United Kingdom: Holiday Pay Turmoil
Under the EU Working Time Directive, EU workers are entitled to 4 weeks holiday (vacation) pay per year. However, in the UK, almost all workers are legally entitled to 5.6 weeks (28 days) paid holiday, known as statutory leave or annual leave. Bank (public) holidays can be included as part of this leave and if so inclined, UK employers can choose to offer more leave than the legal minimum.
In the absence of any specific EU detail on how holiday pay should be calculated, the UK Government has always interpreted the EU Working Time Directive on the basis that it should be paid on the employee's basic (base) rate of pay, meaning that any other additional payments, for example regular overtime, commissions, bonuses, do not have to be included. As a result, most but not all UK employers have never included such payments when calculating holiday pay.
However, a November 4, 2014 ruling on holiday pay by a UK Employment Appeal Tribunal (EAT) has the potential to affect any employer that requires its workers to work overtime by holding that both guaranteed and non-guaranteed compulsory overtime worked by a worker should be included when the employer calculates holiday pay. The ruling leaves open to interpretation whether or not other forms of additional payments should also be included.
These additional pay elements need only be included when calculating the amount paid for the 20 days holiday required under the EU Working Time Directive and therefore need not apply to either the additional 1.6 weeks (8 days) holiday or to any additional leave over and above the required UK minimum. The EAT ruling therefore suggests that the UK government and most UK companies have been incorrectly interpreting the EU Working Time Directive and crucially ruled that employees can make claims for backdated holiday pay.
While technically now the law, the EAT has given leave to appeal so it could be some time before a final decision is given. Additionally the UK Government has yet to confirm precisely how employers would be required to enforce the decision. Clearly, this decision has the potential to dramatically affect all UK employers both operationally and financially.
What should UK employers do?
The majority of UK employers are likely to be affected but before determining a strategy, it is important that the issues and their implication be assessed. Companies at particular risk will be those whose pay structure includes overtime, commissions, allowance and bonuses, those whose holiday pay entitlements affect other forms of compensation (e.g. pension contributions) and those that are unionised. Any company that already takes these payments into account when calculating holiday pay and has good historic holiday pay records will be able to largely eliminate or mitigate the risk.
Radius will be on hand to provide additional guidance on what has become a very confused position for UK employers and we will continue to update our clients on developments.