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Part two holiday pay state of flux: Steps to take in the meantime

Holiday pay calculations burst into public awareness last year after certain retailers paid out significant sums for historic holiday back pay. This led others to question whether they have similarly large liabilities lurking…

Calculating holiday payWe have been following the holiday pay cases and updating you on their progress in our blogs.  This blog focuses on our experience of the market and provides some practical guidance on how you may approach this issue. Part one discusses our predictions for the outcome of these cases.

Wait and See v Proactive Steps

Many employers adopted a “wait and see” approach until earlier this year because the decisions are, so far, only first instance tribunal decisions. We are, however, seeing a growing shift in position and a number of employers are taking advice and assessing the value of proactive steps to change the way holiday pay is calculated.

The key benefit of being proactive is that this may mitigate or even prevent significant claims for back pay dating back years. Although it is a matter to be tested in the courts, there is a strong argument that the six year limitation period may not apply to holiday pay claims and therefore back pay claims could date back to the start of an employee’s employment or right back to the introduction of the Working Time Regulations in 1998. The concern of most employers is therefore not just making future changes, (for which they can make budgetary provision), but the potentially significant back pay claims.

Taking tentative steps

A key concern is that any change an employer makes may alert employees and unions to the fact that they could bring claims. Rather than preventing back pay claims, such action could open the flood gates. Most employers are therefore taking a cautious approach, particularly if they are unionised and seeking to have sensible early discussions with unions about how this might be addressed.

Other employers are adopting an “under the radar” approach and quietly making certain changes to holiday pay calculations, such as, starting to include non-voluntary overtime in the calculations, and then hoping that these changes go unnoticed by employees who are simply pleased to be paid a little more. Meanwhile the limitation clock will be ticking and if employees have not issued claims within three months of such a change being made, they will no longer be able to pursue back pay claims.

Practical Steps

Even if you prefer to wait for some binding case law authority, there are contingency plans that you can make, such as budgeting in your accounts for a potential increase in holiday pay, or considering what changes you can make in the future to pay for these changes. For instance, if you negotiate pay increases on an annual basis with employees, in order to budget for an anticipated rise in holiday pay you may decide to award a lower pay rise this year.

One area, upon which we await interpretation from UK courts, is that holiday pay must include some consideration of commission and many employers are already considering more innovative approaches to commission schemes. This could include scrapping commission schemes altogether; moving to an annualised system of paying commission instead of monthly; or making commission payments based on team, rather than an individual performance.

Bear in mind if you are considering changes that the new rule only applies to the four week European holiday entitlement and therefore you could adopt a different approach in relation to the additional 1.6 weeks granted under UK law.

We will be in attendance at the EAT on 30 and 31 July 2014 to listen to the appeals in the current holiday pay cases and will be Tweeting live from the hearing. Keep up to date and Follow us @dwf_employment

Tell us your views about calculating holiday pay and take part in our short survey

 

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further