Holiday pay - what’s all the fuss about?

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Many manufacturers have heard something about holiday pay being a problem, but might not know what the problem is.

If you currently pay overtime, commission, bonuses or anything other than just basic pay, read on.

Ignoring the technical legal detail, here's a run-down of the basic issue – but please note that not everything is covered.

First of all, could this cost my business anything?

Yes. There are very, very few businesses we have spoken to, (and we have spoken with many), who don't have some financial liability as a result of this issue.

Typically, the liabilities amount to 3-4% of current payroll, but there are also likely to be some significant past liabilities – for many SMEs easily over £1m. For some, much more.

What's the problem?

This is all tied into the Working Time Directive, or the WTD – it's no news that this gives every worker a right to 4 weeks paid leave a year. But, the directive doesn't tell us what the “paid” element of this is.

How is pay for a worker on leave to be calculated? UK law has a way of calculating this, which is generally, quite narrow. But, given this is EU law, the UK doesn't have the final say – that rests with the Court of Justice.

And the Court has a different view, which is that anything that is intrinsically linked to the job should be included. They have already decided that some allowances should be included and also that commission should.

They are likely to say that other than small amounts, irregularly paid to employees (which will account for almost nothing) almost everything else should be included in the holiday pay pot.

So, what's the impact of all this?

The bill for holiday pay will go up, unless you are an employer who already calculates holiday pay to include everything/almost everything which an employee earns over a year – we have found very few.

Our members are telling us that for a typical manufacturing company this will add 3-4% to payroll.

Does this affect only hourly paid staff then?

No – it does affect many hourly paid staff who, for example, work overtime, but also salaried staff who might be paid allowances or commission.

What did you say at the start about “significant past liabilities”?

So far, this is only half the story. Let's assume that you're reading this and that your business has never included all the “add-ons” to holiday pay that the Court of Justice has added in. Well, this means that you are underpaying your employees for their holiday.

In the UK, if an employee is underpaid, or something is taken out of their pay unlawfully, they can bring a claim. No real surprise there. But, if there are a series of similar deductions from pay, then the employee can connect them together, in a single claim.

What this means then is that an employee can claim “back-pay” – the pay that they would have received in the past, on the basis of the Court of Justices' new calculation.

So how far back can an employee claim?

1998, or the start of employment, whichever is the later date. Employers with long service employees therefore face the greatest exposure.

Can we change the law?

Unfortunately not as it's European Law. The only thing we have some control over (but not total) is the back-pay issue, which we can do something about. EEF has proposed changes to government, who are acutely aware of the issue.

But I've always complied with UK law

To the huge frustration of many UK employers, this is true – they have been paying their workers for their holiday quite correctly according to UK law. The problem is that the Court of Justice have moved the goal posts and widened them, hugely.

What about overtime?

Currently, today, it has not been finally decided if overtime should be included in holiday pay – but, many experts are expecting that it will be.

Is that it - what do I do now?

Unfortunately, that's not it – technically the problem only extends to 4 weeks of annual leave, not all of it, further complicating matters, and it's possible that there may be past liabilities for tax, NI and pensions.

EEF is running seminars for employers, both members and non-members – check out the EEF website.

The good news amongst all the bad is that there are things that employers can do now to reduce the impact of this. It's not a cure, but acting early is likely to help.

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Media Team 020 7654 1576

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