Landmark tribunal hearing rules that overtime should count in holiday pay

The Employment Appeals Tribunal (EAT) has, this morning, ruled that it is wrong for employers to only take into account basic pay when calculating how much an employee should be paid while they are on holiday.

This decision comes after three employees of a maintenance company claimed that voluntary overtime pay should have been factored into their holiday pay. Under European law, workers are entitled to 4 weeks’ holiday pay a year but there are no details on how this should be calculated. The UK’s interpretation of the law, implemented in the Working Time Regulations 1998, says holiday pay should be at the worker’s basic rate and that it is a “grey area” for those who work overtime or receive variable pay. Today’s EAT decision confirms that it will be unlawful for employers to ignore overtime income when calculating holiday pay. The EAT in their ruling reiterated that claims in respect of unlawful deductions from holiday pay were subject to the three-month limitation period contained within the Employment Rights Act 1996. This limits any retrospective liability on the part of employers and effectively rules out a large number of historic claims which had been awaiting the outcome of the test case.

Nevertheless, the Government have estimated that around one sixth of the 30.8 million people in work get paid overtime and therefore it is expected that around 5 million workers could be entitled to more holiday pay. Business groups including the British Chambers of Commerce warned that the “holiday pay time bomb” could have a devastating impact on small businesses. Given the financial implications of this decision it is expected that the EAT’s ruling will not be the last word on the matter and that the case will progress to the Court of Appeal

Contact: Emma Thompson