There has been a torrent of recent case law on holiday pay issues with the courts considering whether commission payments, compulsory overtime, voluntary overtime and a pilot's "(i) flying allowance and (ii) time away from base payment" should be included when calculating an employee's holiday pay. The case of Williams v British Airways concluded that holiday pay should include "all the components intrinsically linked to the performance of tasks".
In the event that an employer now faces a historic back pay issue in light of one or more of these recent decisions, it has a few options, some of which are markedly more favourable than others if successful.
- The "John Lewis option". The employee-owned John Lewis Partnership recently paid £40 million to staff so as to settle any back pay claims. The advantages of doing so was that it will face no ongoing contingent liabilities, it will avoid litigation and the decision will boost workforce morale. The obvious downside is the cost.
- The next option is to pay the overtime/commission going forward. This would again boost workforce morale and once three months has passed since the last underpayment, any employment tribunal claims would be out of time. The downside here is that, by taking this action, it may draw employees' attention to the issue and claims can still be lodged in civil courts over back pay after three months.
- Reduce overtime and commission entitlements going forward. Whilst this may eventually "wash away" the potential liability over time in the event that employees do not push back on this, the downsides are many. You would need the contractual right to make the changes and workers are extremely likely to object – especially with overtime, and again it may trigger litigation for back pay.
- Defer payment of commission and overtime until paid annual leave is taken. This may facilitate an argument from the employer that the entitlements did not arise within the 12 week reference period when calculating "a week's pay" (if that is the method of calculation that you adopt) and the amount of holiday pay. Tribunals may count the payments as part of the reference period anyway as it was earned during the 12 weeks and this option would require a change to the Contracts of Employment to entitle the employer to hold back the payments for an interim time.
- One of the most favourable options, particular for private sector employers is to simply carry on as before, whilst hoping that workers do not litigate on the issue. This gives the advantage of not having to pay, or paying much later if there is legal action (which is likely)! However, the overall bill to the employer would be markedly higher if this were to happen.
Confused? The solutions will vary from employer to employer. This is an important topic and we will look at the issues in detail at the Autumn HR Exchange events.