Calculation of holiday pay

THE effects of a recent landmark ruling by the Employment Appeal Tribunal concerning the calculation of holiday pay are becoming clearer.
Before the ruling it was normal for holiday pay to be calculated on basic pay only. The EAT, however, ruled that overtime must be included in the calculation. The ruling also brings in commission payments as well as other payments intrinsically linked to the employment such as productivity payments or attendance allowances.
It was thought that this could open the floodgates for backdated claims, and many commentators were saying that some companies may close. However, whilst the ruling will add considerably to the on-going costs for some companies, it is becoming clearer that the scope for claiming back pay is smaller than originally thought.
Firstly, the ruling only applies to the basic four-week statutory holiday entitlement and not to the 1.6 weeks additional entitlement provided by the Working Time Regulations, or to any additional holiday entitlement created by the contract of employment.
Secondly, it seems that claims for underpaid holiday pay can only be brought provided that there has not been a gap of more than three months between periods of underpayment. Er, what? – I hear you say! Well, for instance, if a worker has been underpaid for two weeks holiday in June, is then correctly paid for time worked in July, August and September, but then is underpaid for two weeks in October then a claim can only be made for the October underpayment. The three months of correct pay would preclude a claim for the June underpayment.
All of the above may still be subject to further appeal. However, the EAT said that any appeal on the basic premise of what should be included is highly unlikely to succeed and that any appeal should only be on the question of how far a claim can go back.
Two things are certain. Firstly, this is a huge additional burden placed on employers, and not just because of the additional cost that it imposes. It increases enormously the complexity of the regulations, and this at a time when the government is pledged to simplify the regulations faced by small businesses. Secondly, the first time that this will affect the majority of people is in a couple of weeks’ time!
Which reminds me. The partners and staff at WatkinsonBlack wish you all a very merry Xmas, and hope that we all have a very prosperous, but more importantly a very healthy, 2015.
WatkinsonBlack are pleased to advise on these as well as other matters, including providing a very cost-effective payroll bureau service. If you want to arrange a no-obligation initial meeting on any taxation or accounting matter then please contact us.
Please note that these ideas are intended to inform rather than advise and you should always obtain professional advice before taking any action.