New holiday pay rules come into effect

Employers will need to account for overtime when calculating holiday pay from 1 July 2015.

The Employment Appeal Tribunal (EAT) ruled in November 2014 that employers must factor in overtime, commissions and bonuses when making holiday pay calculations, instead of only taking basic pay into account.

Holiday pay for employees who receive irregular remuneration will now need to be calculated based on total earnings of the previous 12 weeks.

The changes apply to guaranteed and non-guaranteed overtime:

Employees are entitled to launch a claim against their employer within 3 months of the deduction if they believe that overtime has not been included in their holiday pay.

Employees will also be able to make backdated claims for a series of deductions provided that the gaps between deductions are not longer than 3 months. The government responded by amending regulations so that backdated claims cannot go back further than 2 years.

The ruling covers the 4 weeks of annual leave stipulated by the EU Working Time Directive and not the full 5.6 weeks provided under British law.

What does the ruling mean for you?

You should examine your holiday arrangements and make sure that guaranteed and non-guaranteed overtime (and other work-related payments) is used to calculate holiday pay.

You may also want to review any commission or bonus policies, though you should think carefully before changing employees’ pay structures.

The changes could bring extra costs to your business, especially if it relies on commission-based work or overtime. Plan for the event of employees making backdated claims and don’t underestimate the time needed to review your pay structure.

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