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Howes Percival comments on landmark overtime ruling

Employers must now pay holiday pay at a rate which takes into account normal non-guaranteed overtime.

As a result if an employee works overtime on a regular basis then employers must ensure that their holiday pay takes into account the additional hours worked. Irregular, sporadic voluntary overtime appears to be excluded.

Howes Percival's Paula Bailey comments: "This is a landmark decision with far reaching implications for employers. Whilst there is scope for an appeal companies should not ignore the ruling and need to ensure that they are taking steps to understand their potential liability so that, where possible, they can start to pay the correct rate of holiday pay and limit the scope of historic claims before any appeal takes place."

Certain allowances such as radius allowance and travelling time payments should also be included when calculating holiday pay, where there is a direct link between the payment and the tasks that a worker is required to carry out and the payment is made for a sufficient period of time.

However, this rate of holiday pay only has to be paid for the basic 4 weeks' leave granted under the Working Time Directive, not the additional 1.6 weeks under the Working Time Regulations. In reality though, providing two separate rates of pay to employees may prove an administrative nightmare.

Howes Percival's Paula Bailey comments: "Employers will be slightly comforted as there appears to be some protection from large claims, with the EAT limiting workers' ability to claim for historic holiday pay. Any claims for arrears of holiday pay will be out of time if there has been a break of more than three months where no underpayment has been made (subject to the reasonable practicability test). In practical terms this is likely to mean that historic claims will be limited to the most recent leave year (though this part of the decision is likely to be appealed)."

Practical implications for employers

Employers will now need to assess their potential exposure by reviewing their pay structures, historic holiday records and the prevalence of overtime within the organisation.

Employers have a number of options going forwards:

&middot                     Ensure that correct payments are made in the future. This will ensure that any future liability is extinguished. In addition, if employees do not claim promptly for previous underpayments then these claims may fall away.

&middot                     If employers are particularly worried about historic claims, they may wish to try and settle with employees now to extinguish the risk of future claims and then pay the correct amount going forward. However, this may result in businesses paying out more than they are legally obliged to, particularly if the appeal goes ahead.

&middot                     Some employers may do nothing and wait for further legal developments. However, this is a high risk strategy as potential liability will continue to accrue and if the appeal decides that the scope of historic claims is increased they could have to pay out increased sums.

&middot                     Employers may also look to limit the amount of overtime offered going forward if this is possible, to try and limit the amount that will have to be paid during periods of annual leave. Employers may choose to engage temporary workers more where there is a need for overtime hours.

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