Breaking news…EAT confirms holiday pay must include overtime payments – what should employers do?

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In one of the most important employment law decisions of the decade (in terms of its practical impact on employers), the EAT has today held that holiday pay should include non-compulsory and non-guaranteed overtime payments. This is a decision with huge implications for employers because most will have calculated holiday pay to include basic pay only (as the Employment Rights Act 1996 currently requires). The EAT has held that current UK law does not adequately implement the EU Directive on Working Time. This means that, despite the fact employers have paid holiday pay in compliance with UK law, this is not enough.

Given the financial burden that this decision may place on employers, the Business Secretary, Vince Cable, has confirmed that he will be setting up a taskforce to assess the potential impact of the ruling. Even with a taskforce in place, it is inevitable that claims for backpayment of holiday pay will now be lodged and Unions and claims firms will be busy enrolling claimants. It is also likely that claims will be brought in respect of overtime and other supplementary payments following the ECJ decision in Lock v British Gas. The EAT decision simply underlines the overall direction of travel of the European Courts (and now the UK Courts) in this area.

The background to this decision is well-rehearsed – for details see our recent update. So what does the EAT’s decision mean for employers?

Our employment team have been following the progress of this case and have prepared some key bullet points which employers may find useful:

  • First, don’t panic and avoid succumbing to pressure to make ‘kneejerk payments’. This decision is not entirely unexpected and many employers will already have taken steps to assess their exposure. For those that haven’t – there is still time to do so although this should be made a priority.
  • Secondly, the decision is almost certainly going to be appealed (indeed permission to appeal has been granted by the EAT Judge). Following usual practice, this means that any claims to a Tribunal are likely to be stayed pending the outcome of an appeal.
  • Thirdly, it is now even more important than ever to undertake an exposure audit as referred to in our update (link above). Once the audit is complete you will have a clearer picture enabling you to decide what steps, if any, can be taken to mitigate or minimise potential exposure. One of the key areas to consider is whether the ‘chain’ of deductions can be broken thus limiting the ability of claimants to make backpayment claims over many years. It may be that employers can argue that the ‘series of deductions’ has been broken where more than 3 months have passed between underpayments. This is one area where employers were successful in the above case.
  • Fourthly, don’t score an ‘own goal’. Ensure the audit is legally privileged (i.e. it is conducted via your legal advisors) otherwise it will be ‘disclosable’ in future litigation and could be very damaging.

Walker Morris’s employment team are able to assist with the above steps. Please contact David Smedley or Andrew Rayment.