Paying staff holidays – a Christmas headache for retailers?

The Employment Appeal Tribunal (“EAT”) handed down last week its decision in the “overtime” holiday pay cases. Understanding this decision will be critical for retailers whose staff, both seasonal and permanent, will doubtless undertake overtime work, particularly in the run up to Christmas and the post-Christmas sales period.

Paul Killen, partner in the employment team at Osborne Clarke comments: “much focus has been given to the impact of the EAT judgment on historic holiday pay claims. However, retailers are heading into a critical period where staff issues and costs going forward are key to success. The ruling opens up the ability for temporary seasonal workers to argue that their normal remuneration includes any overtime they work bringing with it an unexpected potential holiday cost for employers at the end of the Christmas period when temporary staff leave. And what will be the implications for permanent staff working overtime during this busy period? Would their overtime be sufficiently regular to count as normal remuneration? Will there be a rush on holiday requests in January to take advantage of any increased holiday pay? These are issues HR and management in retail must now get on top of as a priority”.

Headline points for retailers are:

• The EAT has confirmed that workers should receive holiday pay which reflects their “normal remuneration”.
• The cases before the EAT dealt with regular non-guaranteed overtime (being overtime that an employer may offer and, where it does so, the worker is required to undertake it). The EAT confirmed this overtime was normal remuneration and should be reflected in holiday pay. However, the decision does not rule out the possibility of regular voluntary overtime also now falling within holiday pay i.e. where an employer may offer overtime and which an employee may accept.
• One question to be answered would be whether overtime during peak periods such as Christmas (whether non-guaranteed or purely voluntary) would be sufficiently regular to form part of normal remuneration. Of concern is the fact that this answer may well be different for permanent and temporary staff depending on what reference period employers should use to assess “regularity”. At present there is no clear guidance on this point. What is clear is that, with the publicity surrounding this decision that “overtime” is included in holiday pay, a worker’s expectation will almost certainly be “yes” in both respects and this will need to be carefully managed.
• Uncertainty also surrounds how overtime should be calculated within holiday pay. Again, judicial clarification would be welcome, but until then using a 12 week reference period in line with other provisions in the Employment Rights Act 1996 used for calculating holiday pay is currently gaining the popular consensus.
• On a more positive note, the EAT confirmed that its interpretation of the WTR only applies to the four weeks statutory holiday provided under European law in the Working Time Directive (“WTD”) and not the additional 1.6 weeks the UK Government subsequently introduced. In practice, going forward, many retailers may wish to treat all statutory holiday the same for administrative reasons, but where the impact on holiday pay is significant the EAT’s decision in this respect is helpful.
• With respect to existing staff, a significant concern has been the potential ability for workers to make historic claims of incorrect holiday pay going back over many years under the unlawful deduction of wages provisions. The EAT has indicated that claims for arrears of holiday pay will potentially be out of time if there has been a break of more than three months between successive underpayments. Further, workers will be unable to essentially create a “series” by designating certain holiday as “WTD” holiday and earlier holiday within the holiday year as not “WTD”.
• However, in talking to employers we represent, we have found that many still see historic claims as a significant potential expense (aside from the fact that this aspect of the ruling may well be appealed). Further, the EAT did not clarify whether an employee can bring a breach of contract claim in the high court/county court for breach of statutory holiday pay (the limitation period of which is six years) so that is still unknown and likely to be the subject of much debate.

Whilst holding that a reference to the European Court of Justice was unnecessary, the EAT has given leave to appeal to the Court of Appeal. However, it indicated that it was only the historic issue (see the sixth bullet above) which it considered may have any prospect of success on appeal. In the meantime, employers have some comfort against the risk of potentially crippling historic claims.

What should retailers do now?

• Retailers will now need to carefully scrutinize and potentially change their holiday pay practices going forward where workers receive regular overtime payments in addition to a basic salary. The forthcoming Christmas/sales period pushes the issue of holiday pay and employee relations sharply into focus for retailers and a thought through strategy now needs to be put in place. We have developed an online holiday pay risk analysis tool to enable employers to understand their current holiday pay practices and the impact of these rulings. Please contact your usual OC Contact for more details.
• Ensure managers are aware of the issue and how they should deal with staff queries going forward. We shall be happy to provide you with a Q&A for staff explaining the employer’s position on holiday pay and overtime working. Managers should be made aware that they must treat requests seriously and fairly. A worker will be able to bring a claim if he or she is subjected to a detriment for asserting his or her statutory right to holiday pay and any dismissal will be automatically unfair.

A copy of the EAT decision is here.