The Employment Appeal Tribunal’s ruling on overtime will change how holiday pay is calculated – how will this verdict impact retailers?

While Tuesday’s landmark ruling by the Employment Appeal Tribunal on how holiday pay is calculated has certainly stirred up a lot of mixed emotions, how worried should retailers really be?

The tribunal this week ruled that overtime should be taken into account when calculating holiday pay.

This outcome potentially gives a significant number of UK workers – who have been paid holiday pay calculated on their basic hours only – claims for unlawful deductions from wages, although the decision effectively manages to limit how far back the claims can go.

Leaving aside the existing claims, the decision certainly gives employees who don’t have overtime included in their holiday pay, the right to higher holiday pay going forward.

The impact of this ruling on retailers will vary, depending on what arrangements each has around holiday pay, but it is fair to say that it could cost the UK retail industry millions. And it is not just overtime that retailers should be worried about.

While I am not going to try and distill a 36-page ruling into a few paragraphs, here is an explanation of a few of the most pressing aspects for retailers:

Voluntary vs non-voluntary overtime

This ruling specifically refers to ‘non-voluntary’ or ‘compulsory’ overtime – something that 5 million employees in the UK do, according to the ONS.

It doesn’t mean, however, that those retailers who don’t have these sorts of arrangements in place can breathe a sigh of relief. This ruling has only paved the way for further cases to seek clarity over the definition of ‘voluntary’ and ‘non-voluntary’ and how regularly it needs to be done to count within ‘normal pay’.

Retailers should seek advice on their existing arrangements and at the very least ensure they are keeping the appropriate holiday and payroll records.

Back-dated claims

There is a lot of technical reference to ‘EU’ and ‘UK’ leave within the ruling that, combined with the fact that a gap of three months between holidays negates any claims before this gap, should at least reduce claims to the last 12 months.

Here is why. Under EU law, employees are entitled to four weeks’ paid leave while UK law stipulates that employees are entitled to 5.6 weeks’ leave.

The decision this week only relates to EU leave, which, the judge indicated, in the absence of a contrary indication from an employer, is presumed to be taken before UK holiday each year.

This means that as we are nearing the end of the holiday year for many people, usually a calendar year, retail employees will be in their ‘UK leave’ period (having already taken four weeks leave). 

As the decision doesn’t impact the ‘UK leave’ calculation, employees theoretically can’t claim for this time and, if it has been more than three months since they took ‘EU leave’, they will be out of time to claim. Even if they can claim, the 1.6 weeks of ‘UK leave’ will have broken the chain of causation.

This is good news for retailers but is also the part of the ruling that is likely to be appealed against most by employees, especially due to the irregularity and seasonality of overtime in the retail sector.

For some retailers, engaging with employee reps on the issue sooner rather than later, would be a good idea.

Looking beyond overtime

Beyond overtime, employees in the retail sector have many other aspects to their pay that could impact their holiday pay calculation, and which employers should be concerned about – bonuses, commission, shift premiums or allowances, for example.

This is highlighted by another key case in the holiday saga, Lock v British Gas, in which the Court of Justice of the European Union has already decreed that commission should be taken into account when calculating holiday pay.

It is now for the Leicester Employment Tribunal to decide early next year, but this could clearly have significant implications for any retailer who operates a commission-based scheme.

This also clearly plays into the argument around the distinctions between performance and discretionary bonuses and whether the latter should be included in the holiday payment calculation.

The numerous cases and appeals around holiday pay demonstrate the complexity of this issue. The question also remains whether this is something that should be resolved by case law or Parliament – something I am sure Mr Cable and his taskforce will be paying close attention to.

Before this week’s case a survey of our clients showed that 28% had already experienced employees raising concerns about the way their holiday pay is calculated. I have no doubt that this has shot up quite significantly over the past couple of days. Retailers need to act now to limit the damage.

  • Kirsty Rogers is a partner at law firm DWF