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Employment Appeals Tribunal Rules on Holiday Pay

SME newsThe Employment Appeals Tribunal has announced its judgement on the correct interpretation of EU rules on holiday pay.

As expected, they have ruled, to the consternation of businesses across the UK, that overtime payments should be included when calculating staff holiday pay.

This chastening burden however could have been worse.

The spectre of backdated claims, potentially to the original implementation of the EU Working Time Directive in 1998 has been abated as the tribunal ruled that claims could not be made for leave taken more than 3 months prior to any claim.

The issue has arisen due to the intent of trade unions to open up another battle with businesses in an otherwise relatively benign environment for industrial disputes.

Quite what trade unions hope to achieve over the long term from increasing the cost base of UK businesses is unclear, however short term ‘victories’ have long been the mind-set of such organisations.

Under the Working Time Directive it states that holiday wages should be “based upon normal pay”.

Quite reasonably UK businesses typically interpret this as the basic salary paid to an employee.

Unions however have felt differently and claimed it should include payments for voluntary overtime. Not only that but they have also pressed for the inclusion of OTE (On Target Earnings) commissions to be included too.

Reacting to the news of the decision, Vince Cable, the Liberal Democrat Business Secretary, said:

“The Government will review the judgement in detail as a matter of urgency.

“To properly understand the financial exposure employers face, we have set up a taskforce of representatives from Government and business to discuss how we can limit the impact on business.”

Whilst John Cridland, CBI director general, said:

“These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions.

“This judgment must be challenged. We need the UK government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face.”

Tim Thomas, Head of Employment policy at the EEF, the manufacturers’ organisation, said:

“Many businesses will now be left facing difficult choices, despite having always complied with UK law, and there is a real danger that this ruling could ultimately hit jobs, pay and future investment.”

Howard Beckett, of Unite, one of the unions involved (rumours that he was wearing blinkers at the time of his comment were denied) however claimed:

“Up until now some workers who are required to do overtime have been penalised for taking the time off they are entitled to. This ruling not only secures justice for our members who were short changed, but means employers have got to get their house in order.

“Those that don’t should be under no illusion that Unite will fight to ensure that our members receive their full entitlement.”

Adam Marshall, of the British Chambers of Commerce, said:

“This expanded definition of ‘pay’ is so ludicrous that the government itself has argued against it. No business should have to pay more than base salary during holiday periods, unless they elect to do so. Firms could be at risk of incurring significant financial losses, which could force them to close their doors altogether.”

Unsurprising the reaction of businesses is likely to be a reduction in the availability of paid overtime, a potential reduction in staffing levels and hiring intentions and potentially the end of commission based employment packages.

That is hardly good news for employees.

However there is an even more apocalyptic prospect with Mike Cherry, policy chairman of the Federation of Small Businesses, saying:

“The government must bring in emergency legislation to prevent the backdated claims. [If they don’t act] hundreds of businesses will shut down and that will lead to thousands of employees being laid off.

“Business has done everything it could to comply with the law at the time and now to have it changed is totally wrong. Our members are very clear about this – it could have severe implications.”

A spokesperson from the Department for Business, Innovation and Skills added:

“We do not believe voluntary overtime should be included in holiday pay and are concerned about the potential impact on employers”

Not only are the cost implications huge for employers. The additional administrative burdens are just as challenging.

The ruling only applies to the mandated 20 days annual leave for employees under EU policy. This means that any additional leave offered by employers over and above this level could be interpreted on a different basis i.e. paid at basic only not at basic plus overtime. That is not a pleasant prospect for HR and Finance departments up and down the land.

With the cases regarding commission payments still to be heard the impact of the Employment Appeals Tribunal could prove even more wide-ranging and damaging for the UK economy.

However given the weight of the opposition to the decision an appeal is highly likely and given the stakes involved this could well reach the European Court for final decision meaning implementation of any such policy is years away.

The only winners in this are the unions who may just have justified their existence for a little longer.