Holiday pay rule leaves questions unanswered
Major costs to businesses are likely following new employment tribunal ruling, says John Allan
A far-reaching ruling on calculating holiday pay and overtime from the UK Employment Appeal Tribunal (EAT) was announced yesterday (4 November).
The ruling leaves many questions unanswered. It has the potential to be very damaging to small businesses, presenting a risk of small firms being forced to close down if faced with 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.
The FSB has been appointed to a government taskforce to examine this issue and will be fighting hard for small businesses to be insulated from the uncertainty and legal risks this ruling brings.
A recent survey found that a third of our members with employees paid staff for voluntary overtime. One in 10 also offered some form of commission.
There are 4.9m small businesses in the UK, and if the rule is backdated, it could create substantial unexpected cost liabilities for employers and trigger multiple claims going back many years.
The ruling is the first UK interpretation of a controversial European Court of Justice decision.
The Court has been examining the relationship between annual leave and voluntary overtime, commission and shift payments.
The ECJ said that holiday pay – on the EU portion of leave only, that is four weeks – must take other payments into account, so an employee is no worse off for going on holiday.
The UK ruling decides the extent of UK businesses' liability for payment of holiday pay in cases where employees routinely earn extra money on top of their basic salary through voluntary overtime.
Similar rulings are expected to follow on commission payments.
These rulings could have a significant cost implication for those businesses that pay voluntary overtime or commission and firms will need to look at how they structure pay and overtime.
John Allan is national chairman of the Federation of Small Businesses (FSB)