A series of recent cases may oblige employers operating in Technology, Media and Telecoms to include average overtime, commission/bonuses and allowances when calculating holiday pay. This liability could be retrospective, extending back six years and possibly to 1998, exposing employers paying significant overtime, commission and allowances to very substantial liability.

Employers operating in the sector should therefore:

  • audit their exposure to claims and take advice on how to mitigate this risk; and
  • secure appropriate indemnities covering liability for historic shortfalls in holiday pay when acquiring businesses with staff.

Background

The EU Working Time Directive entitles employees to take 20 days’ paid holiday every year. The UK government increased this allowance to 28 days, including bank and public holidays.

The Directive does not specify which elements of pay should be included when calculating  paid holiday. The UK courts have previously taken a restrictive approach, limiting holiday pay to basic pay and average overtime pay, but only if the overtime is both obligatory and guaranteed.

A series of recent European and UK cases have challenged this restrictive approach. These cases are at varying levels of appeal. Depending on their outcome, there is a significant risk that employers will have to recalculate holiday pay to take account of most/all overtime, supplements, allowances, commission and possibly even some bonuses paid over a defined period.

More significantly, there is a risk, depending on how the courts approach this issue, that liability for increased holiday pay could be retrospective. Employers might then become liable for shortfalls in holiday pay over the last 6 years and possibly back to 1998 when the right to paid holiday was introduced.

For employers paying significant overtime, commission and allowances the historic liability for shortfalls could be very substantial. Further, retrospective changes to holiday pay could trigger a recalculation of pension entitlements.

There are already hundreds of claims for shortfalls in holiday pay in the Court system, pending the outcome of the leading cases. The unions are actively encouraging their members to prepare claims.

Implications for transactions

These cases significantly increase the risks faced by:

  • the purchaser of a business with employees, whether as an asset or a share sale;
  • companies tendering for work which will entail the TUPE transfer of staff; and
  • companies involved in outsourcing

As they will become liable for employees with potentially substantial claims for historic shortfalls in holiday pay.  A particular difficulty with TUPE and outsourcing is that incoming employers may not have historic records with which to defend claims.

Implications for employers generally

All employers should audit their compensation arrangements to assess their risk profile. These can be adjusted to reduce future exposure. Steps may also be available to mitigate liability for retrospective claims.

Implications for Pension schemes

Where potential liability exists it may also impact on the calculation of pensions. If commission and/or overtime payments are pensionable earnings, then logic demands that a pension contribution will also need to be paid by the employer in relation to the payment in lieu of commission/overtime.   Again, specialist advice should be taken.

For example, if a pension scheme’s rules define “pensionable salary” as including commission (and/or overtime, etc), then employers may become obliged to pay additional pension contributions to reflect backdated payments for shortfalls in holiday pay if the claimant is a member of a defined contribution scheme. The trustees of defined benefit schemes may need to recalculate members’ benefits (and top-up pensions in payment) to reflect these backdated payments.

There may also be implications for auto-enrolment as regards employees who have not qualified to be auto-enrolled, but, once the additional commission (or overtime) arising during the holidays is taken into account, would have qualified. 

Provision in accounts

Where a liability is identified which relates to the past and is likely to arise, it is normally advisable, with the approval of the Company’s auditors, to make provision in the financial accounts (a) before the liability is realised and (b) before the quantum of any liability is known. Appropriate advice should be taken as making provision will have implications for the conduct of any defence to claims.

Next steps

We recommend that employers in the sector take advice on their risk profile and take appropriate steps to mitigate their exposure to claims.