Today, the Employment Appeal Tribunal (EAT) delivered its judgement on three important cases of whether overtime should be factored into holiday pay calculations. As we have expected for some time now, the judgement has gone against employers and in favour of the employee - which in short will mean employers will be paying more when their employees take holiday.
There have been a number of suggestions today as to how many employees (and therefore employers) will be affected, with many suggesting it may be as many as one in six. For manufacturing, where overtime is used extensively, the impacts will be even more wider reaching. Indeed, we have found that over nine in ten manufacturers (93%) say they will see their payroll costs increase if remuneration, including overtime, was included in holiday pay calculations.
These figures range anywhere from adding 1% to over 7% to payroll costs. Indeed a quarter of manufacturers say that the additions of payments such as overtime will add over 7% to their payroll costs.
Unfortunately manufacturers will have little option to take some mitigating action and therefore face some difficult choices ahead:
- 58% say they will need to factor the additional costs into future pay negotiations
- 52% say they may need to reduce overtime
- 33% say they would absorb the costs within the business.
Ultimately the result of such actions will impact employee’s overall pack packages going forward.
A greater cause for concern is perhaps the fact that 24% of manufacturers say they will consider reducing headcount.
The impacts of the changes spread more widely across the business too, with companies citing possible changes to business activities:
- 44% saying they will scale back investment plans
- 31% say they will slash innovation activity
- 36% will now cut back on training.
This is not a matter of non-compliance amongst UK businesses – indeed UK firms have been adhering to UK legal requirements – a key issue we have blogged on previously. The new changes affect only the holiday entitlements derived from the Working Time Directive - four weeks holiday a year - and not the additional 1.6 weeks a year or any additional holiday employers may offer. (If you are getting a bit lost right now and want a bit more detail - might be worth having a quick glance over at our update published today).
Going forward, it is clear that holiday pay will cost employers significantly more, but there is another problem that is to still be tackled – clarification on backdating of pay and the potential liabilities incurred in light of this. This remains a very very grey area. You only have to follow the #holidaypay #UKemplaw trends to soon realise that there are a number of commentators saying very different things and this is something we will be looking to get clarification on pretty sharpish.
We are however are to offer some clearly good news. (Yay!)
In the lead up to today’s announcement we have actively called on Government to consider the wider implication’s changes to holiday pay calculations, and potential backdating of pay may have – whether that is tax or NI liabilities.
Government has now announced a Taskforce that will look at just that. This will be hugely welcomed by employers as it makes clear that the government is committed to supporting businesses. EEF, alongside other business groups, will have a seat around this very important table.
For companies looking to understand how this ruling may affect them, we also have a series of breakfast briefings on holiday pay across the country.