Holiday pay ruling could open the floodgates for claims against employers

The holiday pay ruling by the Employment Appeal Tribunal threatens to open the floodgates to a new wave of claims against employers. The scale of these claims, which could potentially equal those of the payment protection plan mis-selling scandal, poses a serious threat to businesses which are already struggling to recover from the damage caused by the economic recession. 

The judgement, which was announced this morning, related to three cases in which employees had won their original claims against their employers. It sets out the UK’s interpretation of the Working Time Directive in relation to overtime working and holiday pay. It means that anyone working overtime can claim for additional holiday pay, which is currently calculated only on basic working hours. This will not only apply to hours worked in future, but crucially allows workers to make backdated claims.

The ruling has put businesses and the coalition in conflict with trade unions. It has been hailed as a triumph for hard-working and underpaid workers by trade unions, but has serious consequences for UK businesses. This in itself will put trade unions in a difficult position as successful claims against employers will only damage the interests of their members should this affect the viability of the employer’s business. 

The use of overtime has played a crucial role in the survival of businesses striving to maintain productivity without subjecting themselves to the risk of taking on additional employees. The government has indicated that approximately a sixth of the 30.8m people currently in work are paid overtime. The implications to employers of paying additional wages to over five million people could have a hugely damaging impact on businesses and the economy at a time when it is least needed. 

Business secretary Vince Cable has announced that he will be setting up a task force to assess the impact of the ruling, and business groups including the British Chambers of Commerce, the Institute of Directors and the Federation of Small Business have all issued criticisms. The glaring omission of any unions, law centres or other employee organisations perhaps gives some insight into their recommendations.

If backdated claims were permitted to extend to the full potential of 16 years, the results could be devastating. We have already seen John Lewis setting aside £40m to reimburse workers. Smaller businesses could not in the main have the resources to make such provisions.

With this in mind, employers should start thinking now about simple steps they can take to protect themselves such as:

  1. Considering whether they can minimise their future use of overtime, either through recruitment or by using agency staff
  2. Managing overtime more effectively across the entire workforce instead of relying on a small pool of employees
  3. Seeking advice – to ensure they are fully prepared as they will inevitably be receiving claims within the coming weeks.

The good news for employers is that although the Employment Appeal Tribunal refused to grant an appeal to the European Court of Justice, it did give permission to appeal to our own Court of Appeal. In doing so it stated that one of the key issues for the court to consider was that claims for arrears of holiday pay will be out of time if there has been a break of more than three months between successive underpayments. 

If this is upheld, it may offer some welcome relief to employers. This ruling will undoubtedly be appealed meaning that a final outcome could be years, rather than months away.

Read more on the overtime and holiday ruling:

Gearalt Fahy is partner at law firm Watson Burton.

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