Holiday pay "timebomb" goes off in tribunal ruling

04 November 2014 -


Landmark legal decision finds that firms must add overtime to wages paid to staff on annual leave

Matt Packer

Overtime pay must be recognised as part of the wages workers receive during holiday time, following a landmark legal ruling. Heard before Mr Justice Langstaff at the Employment Appeal Tribunal (EAT), Bear Scotland v David Fulton had been closely monitored by business groups who were concerned about the cost impacts that could stem from any ruling that would force bosses to pay over and above basic rate to staff who are taking annual leave.

In the case, road-making specialists Bear Scotland had appealed the outcome of an earlier tribunal which found that the firm had made unauthorised deductions from the wages of employees David Fulton and Douglas Baxter, by failing to include overtime – and other payments associated with their work – in the holiday pay they were owed. The case was combined at the EAT with two other suits, in which firms had asserted that they should not have to settle up for any such deductions in arrears. In what stands as the UK’s most significant interpretation of Europe’s 1998 Working Time Directive, the EAT upheld earlier rulings against all three appellant companies.

One of the most prominent figures to raise concerns over a ruling that favoured the employees was Institute of Directors (IoD) director general Simon Walker. “The holiday pay timebomb could have a hugely detrimental impact on businesses up and down the country,” he said. “It is not an exaggeration to say that some small businesses could end up being wiped out if employers who have acted compliantly and in good faith face [backdated] underpayment claims … Not only do businesses face a huge spike in operating costs, but employees would also be encouraged to book holidays following bonuses or good overtime periods, as it would enhance their pay. This would be an administrative nightmare on a number of fronts.”

He added: “Long after it was agreed, the EU Working Time Directive continues to pose a significant headache for businesses. New employment law is effectively being created at a stroke with each successive ruling. Social and employment policy has quietly slipped off the Prime Minister’s renegotiation agenda, and it is clear from these events that it needs to be put back on the priority list.”

With those potential effects on young, growing firms in mind, the Federation of Small Businesses (FSB) has also sounded the alarm. A recent survey of its members found that 31% of small businesses with employees on their books paid staff for voluntary overtime. Meanwhile, 11% also offered some form of commission. As such, the decision could impact as many as 400,000 UK small businesses.

Ahead of today’s outcome, FSB national chairman John Allan warned: “These rulings could have a significant cost implication for those businesses that pay voluntary overtime or commission, and firms will need to look at how they structure pay and overtime. However, our biggest concern would be the threat posed by backdating the ruling. This could trigger multiple claims going back many years and create substantial unexpected cost liabilities for employers.”

He stressed: “It seems extremely unfair that businesses who have tried to do the right thing – getting the best legal advice at the time – could be hit with a bill which no one knew was coming. Government needs to make sure that good employers, supplying much-needed jobs, are not forced under by a series of backdated claims.”

Following the ruling, Institute of Chartered Accountants of England and Wales (ICAEW) director of business Stephen Ibbotson said: “At a time when business confidence is falling amid an uncertain economic future, this ruling has the potential to seriously impact growth prospects. So many businesses that have struggled to survive during the recession and increase headcount will now find that their costs could increase at a stroke, and the increased regulation from the Working Time Directive will not help them along the way.”

He added: “There are many questions still to answer – just what exactly constitutes regular overtime? What does this mean for commission-based salaries? We’re at the beginning of a long road of appeals and counter-appeals, which only adds to uncertainty – but in the meantime employers will need to ensure that they make provisions for the increased costs that will undoubtedly occur.”

Find the full ruling in Bear Scotland v David Fulton (PDF).

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