05 November 2014
The Government has set up a task force to assess the impact of a landmark tribunal ruling that overtime should be taken
The Government has set up a task force to assess the impact of a landmark tribunal ruling that overtime should be taken into account when holiday pay is calculated, which has paved the way for payouts worth thousands of pounds to workers.
Unions welcomed a decision by the Employment Appeal Tribunal (EAT) on test cases which could lead to claims by hundreds of thousands of workers who do overtime.
The outcome sent "shockwaves" through industry, with companies warning they face a huge bill which could put some out of business.
The Unite union said the ruling secured justice for workers who had been "short-changed" by not having overtime count towards holiday pay, although it insisted it did not open the flood gates because claims will be limited.
The judgments ruled that the calculation of holiday pay based on working time regulations introduced in 1998 was not correct and must now include overtime and can include backdated claims.
The tribunal ruled on two cases relating to the UK's interpretation of the Working Time Directive - one involving electricians, scaffolders and semi-skilled operatives who worked on a project at the West Burton power station site in Nottinghamshire for Amec and Hertel, and one involving road maintenance firm Bear Scotland.
Unite said their members consistently worked overtime, but that was not included in holiday pay, meaning they received "considerably less" pay when on holiday compared with when they were working.
Unite executive director for legal services Howard Beckett said: "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.
"Employers will now have to include overtime in calculating holiday pay, and those that don't should be under no illusion that Unite will fight to ensure that our members receive their full entitlement."
More than nine in 10 manufacturers are set to see payroll costs "spiral" as a result of the ruling, the manufacturers' organisation EEF warned.
The group said over two-thirds of manufacturers estimate that the change to holiday pay calculations will add more than 3% to their current payroll costs, while two out of five anticipate an increase of at least 5%.
Firms will have little option but to factor the additional costs into future pay negotiations and to reduce overtime, while one in four could cut jobs, said the EEF.
"The findings demonstrate the scale of the issue for British manufacturers, who are being punished for adhering to, or even exceeding, UK legal requirements. The decision to apply stringent new EU laws on how holiday pay should be calculated will require employers across Europe to now factor in additional payments such as overtime and commission," said the EEF, which welcomed the announcement of a task force.
Head of employment policy Tim Thomas said: "It's clear that 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."
Andrew Stones, employment partner at international law firm Squire Patton Boggs, who led the appeals on behalf of two of the employers in this case, said: "The entire business community has kept a very close eye on these appeals, given both the range of issues being considered and the shared concern amongst employers of the potential impact of historic holiday pay claims. Those concerns should largely be alleviated following the judgment of the Employment Appeal Tribunal today.
"Although opinions are mixed and we do not agree with some of the findings, we are pleased with the limits put in place on retroactive claims. The EAT has really limited the scope for different holiday pay periods to be linked together as one ongoing series of deductions for historic claims. This finding will significantly limit the scope for such claims in the future and the flowing potential liability for companies.
"While there are likely to be many businesses across the country, both big and small, that are still concerned about how this judgment could impact them, this is a very significant and positive finding for employers worried about retrospective liability.
"In terms of what employers should be doing now, it seems sensible to wait and see if any of the parties appeal. Nevertheless, employers may wish to begin considering how the findings affect the way in which they are currently calculating holiday pay."
CBI director-general John Cridland said: "This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds - and not all will survive, which could mean significant job losses.
"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."
Business Secretary Vince Cable said: "Government will review the judgment in detail as a matter of urgency. To properly understand the financial exposure employers face, we have set up a task force of representatives from Government and business to discuss how we can limit the impact on business. The group will convene shortly to discuss the judgment.
"Employers and workers can also contact the Acas helpline for free and confidential advice."
Adam Marshall, executive director of policy and public affairs at the British Chambers of Commerce, said: "This ruling is damaging for businesses across the UK. Firms could be at risk of incurring significant financial losses, which could force them to close their doors altogether.
"Managers across Britain are now in the difficult position of having to carry out more complex calculations for holiday pay, estimating overtime and commission rates of staff on holidays. 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.
"What businesses fear most is that these judgments will open the door to backdated claims, which could run into the billions. Firms which have complied with existing regulations are shocked by the thought of having to backpay holiday entitlements - a change they could not have predicted.
"The pressure being placed on businesses by both the British tribunals and European courts on the issue of holiday pay is becoming unbearable. After the worst recession in living memory, with many companies working to reverse pay cuts and invest in their employees, giant new pay claims could be a huge blow to their growth prospects."
TUC general secretary Frances O'Grady said: "Failing to count overtime when calculating holiday pay is quite simply wrong. This ruling marks a victory for people who work long and hard to make a living, and who deserve to be properly paid when they take their well-earned leave.
"Scaremongering about the possible impact of this ruling is irresponsible. British business is far more robust than some of its spokespeople would admit. It's worth remembering that in 1999 a change in the law meant that six million people gained more holiday entitlements, and businesses easily absorbed the increase and employment continued to rise."
Brian Gordon, managing director of Bear Scotland, said: "We are disappointed at the decision of the Employment Appeal Tribunal. We believe that we were complying with UK law and common industry practice as some of the employees concerned brought their cases following Tupe transfer from other employers.
"We believe that this interpretation of the Working Time Directive is significant for all UK employers, public and private, and we will reflect on our position before considering how to respond."
John Allan, chairman of the Federation of Small Businesses, said: "Today's ruling leaves many questions unanswered. It has the potential to be very damaging to small businesses, presenting a real risk of small firms being forced to close down if faced by retrospective claims.
"Clearly it would be desperately unjust to expect businesses to pay retrospective compensation for how they calculated holiday pay when they were fully compliant with the law as it was understood at the time."
Chris Laverty, restructuring partner at KPMG, said: "This ruling will send shockwaves through the British business community and some will be landed with a bill that will materially affect their longer term solvency.
"There is no doubt that this correction must be assessed and paid quickly to maintain the goodwill and morale of staff. However, we must not be naive: this ruling will have long-term consequences for the health of UK businesses. In order to balance the books, many may need to shelve investment plans in the short term to enable them to pay this bill. This will dampen growth and potentially impact their competitiveness on the world stage."
Business groups had feared that workers would be allowed to claim backdated pay to 1998, but under the ruling limits will be placed on claims.
Prime Minister David Cameron's official spokesman said the Government had "concerns in regard to the potential cost to businesses" of the ruling.
"That is why the Government was party to the proceedings and why Vince Cable has set up the group which will bring together the Government and representatives of businesses, including the Federation of Small Businesses, to look at the potential detailed consequences of the ruling," said the spokesman.
Unison general secretary Dave Prentis said: "The Government's decision to set up a task force consisting entirely of employers' organisations reeks of a whitewash before the first meeting. It is vital that any task force has the confidence of employees, so we are calling on the Business Secretary to put together a truly representative panel including trade unions."