Small business owners reading about this week’s holiday pay ruling could be forgiven for wanting to get away from it all. The decision by the employment appeal tribunal that overtime and other pay supplements should be factored in to holiday pay has been met with dire warnings of job losses by the CBI and others. But what does it mean for small businesses?
The history
The case stems from a series of rulings by the European Court of Justice (ECJ) that holiday pay must be at a similar level to the pay that the worker actually receives while working, so that workers are not discouraged from taking holiday (for health and safety reasons).
The UK employment appeal tribunal had to decide whether UK law, which currently states that workers with normal working hours can be paid basic salary only during annual leave, should be interpreted differently to bring it into line with these ECJ rulings. The employment appeal tribunal confirmed that it should, and that businesses should therefore factor in overtime (and certain other payments) when calculating holiday pay, as well as basic salary.
What businesses need to do
Holiday pay must now reflect the worker’s actual normal earnings rather than just basic salary. If a worker’s earnings vary depending on the amount of work they do or the times that they carry out that work, their holiday pay should now be based on an average of their actual earnings calculated over a 12-week reference period.
The type of payments that need to be included in the calculation include overtime payments, shift payments (eg unsocial hours payments) and travel supplements (although reimbursement of out-of-pocket expenses would not be included). Bonuses are more complicated – the employers in this case had already conceded that a contractual bonus based on both individual conduct and group performance had to be factored in, but discretionary annual bonuses may not need to be included.
Another thorny issue is commission payments – particularly crucial in small businesses which use commission structures to incentivise staff and drive sales. A case due to be heard next March will look specifically at how commission payments need to be factored in, but the decision earlier this week strongly suggests that commission payments also need to be included in the calculation.
Impact on small businesses
The new requirements will entail additional payroll and national insurance costs for businesses of every size, but these will be felt most acutely by small businesses. SMEs often pay lower basic salaries but use commission and performance-based pay to reward staff who contribute to business growth. A survey by the Federation of Small Businesses (FSB) also suggested that around a third of small businesses offer paid overtime. Having to include these extra payments even when staff are not at work is a real financial blow to small businesses. The FSB has already warned that companies will need to make redundancies and could even be forced to close. Businesses will also be concerned about the additional cost and management time involved in reviewing their employment contracts and working practices and rejigging payroll systems – a real burden for businesses without a large HR team.
The court has offered employers two crumbs of comfort, however. First, the additional elements only need to be included in holiday pay for the four weeks of annual leave guaranteed under EU law, and not the additional 1.6 weeks required under UK law (or, indeed, any additional contractual holiday).
It had also been feared that workers might be able to backdate holiday pay going back as far as 1998, with potentially crippling bills for backdated pay. However, the employment appeal tribunal’s ruling on this issue will make it difficult for most workers to backdate their claims by more than a few months at most. The trade unions who backed the case have permission to appeal on this point to the Court of Appeal, though, so any relief may be short-lived.
The government appears to be firmly on the side of businesses on this issue, having already convened a taskforce of business leaders to look at ways of minimising the impact, and the employers concerned will almost certainly appeal against the ruling on overtime. However, the room for manoeuvre is limited, given the requirements of EU law – something that will no doubt cause much controversy in the lead-up to next year’s election.
Alexandra Mizzi is an associate in the employment law team at Howard Kennedy
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