Holidays used to be simple for employers – you waved goodbye to your staff for two weeks in August and one at Christmas.  No longer.  In recent years, a series of cases in the Employment Tribunals and the European courts have made holiday pay increasingly complex and expensive for employers. The recent Employment Tribunal decision in Neal v Freightliner will only add to these challenges.  

The Tribunal held that a worker’s holiday pay should be calculated not only on the basis of their basic salary but should also include the overtime payments the worker would have received – even where overtime was optional.  The basic principle is that holiday pay should include any element of remuneration ‘intrinsically linked’ to the tasks required under the worker’s contract – so overtime payments, unsocial hours premiums and other add-ons need to be factored in.

The implications for employers are significant.  Not only will holiday pay become more expensive in the future, it also means employers may face claims for unlawful deductions from wages in relation to holiday previously taken.    

Many businesses will now need to review their holiday pay arrangements.   This can be expensive – John Lewis is currently paying out a total of £40 million to staff in back-dated holiday pay.

What do I do now?

Don't panic just yet.  The Neal decision is currently being appealed and could end up in the Supreme Court.  It may be more sensible to await the final outcome before implementing any major changes to your holiday pay structure.  The appeal courts may restrict the scope of the decision or give more detailed guidance as to the calculation required.  However, on the basis of previous cases, it seems likely that the substance of the decision will be upheld. 

We suggest that employers focus their immediate attention on:

• Preparing for potential claims;
• Assessing their likely liability if claims are brought; and
• Preparing to implement changes if the decision is upheld.
• Preparing for claims and assessing liability

We anticipate that many employees will seek to bring claims.  The recent introduction of fees in the employment tribunal may discourage individual claimants, particularly if their claim isn't worth very much.  However, the fee structure means that there is much less disincentive to bring multi-party claims – so employees may bring claims en masse (particularly if they are unionised).  

Defending such claims is often complex and time-consuming – particularly as workers can backdate their claims to 1998 (or the start of their employment, if this is later).  It also involves significant cost, both in lost management time and legal fees.  We suggest that you seek specialist advice, as this is a complex area, but, in the meantime, it's worth collating the information needed to calculate your potential liability.  Look at your payroll, overtime and holiday records and get a sense of how reliable they are, then try to calculate how much you will owe each worker who could bring a claim.

One crumb of comfort is that the potential liability isn’t unrestricted. In most cases, tribunal claims must be brought within three months of the most recent underpayment.  This means that, in practice, only current workers and recent leavers would be able to make a claim. Also, the case only affects holiday pay for the four weeks’ annual leave guaranteed under EU law.  Pay for the further 1.6 weeks required under UK law could still, in theory, be based on basic salary only. 

Preparing for the future

If the Neal decision is upheld on appeal, businesses will need to implement changes swiftly. You can save time by doing some of the groundwork now. For example, you could:

• investigate whether existing payroll systems could cope with including overtime in the calculation;
• consider whether you would want to to calculate all holiday pay at the enhanced rate (rather than just the 4 weeks' leave which the Neal decision affects) to reduce complexity; and
• review the overtime arrangements offered to new joiners.

Businesses will need to ensure that they keep abreast of developments in this area and, if they receive a claim for holiday pay, must be aware of the implications.