A lawyer has warned a controversial ruling on holiday pay could have wider ramifications for employers’ pension bills than originally thought.
The Employment Appeal Tribunal ruled in two separate cases last week that firms were wrong to exclude employees’ overtime payments when calculating holiday pay.
Both the Confederation of British Industry and the Institute of Directors warn the cost of implementing the ruling could run into billions of pounds and force some companies out of business.
PwC pensions partner Peter McDonald says firms could end up paying up to £100m in extra pension contributions. If firms are expected to backdate payments, the figure would be far higher.
Law firm Pinsent Masons said the decision should sound “alarm bells in boardrooms” and could impact pension schemes where variable pay is included in pension contributions.
But DLA Piper pensions partner David Farmer warns even employers using basic pay could find the definitions used in their scheme rules leave the door open for a bigger pension contributions bill.
Farmer says rules vary from scheme to scheme, with some giving precise definitions of exactly what is meant by basic pay and precisely what is included in pensionable pay. But he says in some cases, where wording is looser, it could be argued that variable pay, such as overtime and bonuses, should be included in basic pay and therefore pension contributions.
He says: “If you can’t point to a definition of what basic salary is, then you can open up the scope and say this case [the holiday pay ruling] is looking at the concept of normal remuneration.
“If your scheme rules provide that your pensionable pay is basic salary, there shouldn’t be much of an impact, but you should be looking at what your various elements of pay can be, and whether or not there could be some scope to argue within the definitions of basic salary on your scheme rules and employment contracts that this case could have an impact.”
But Pinsent Masons partner Alistair Meeks said although “the precise definition of pensionable pay in each scheme is important”, he would need “quite a bit of persuading in most circumstances that employers and trustees meant ‘basic salary’ to include elements of remuneration that were discretionary but, in practice, paid with great regularity”.
McDonald expects firms to pay members compensation rather than rebuild systems to take into account the changes. He says: “Potentially it’s just far too complicated to contemplate. “I imagine in reality lots of firms would seek to come to another agreement with the workforce.”
It is expected the ruling will be appealed.
The ruling explained
The Employment Appeal Tribunal has ruled the Working Time Directive, an EU rule sets working rights, should be interpreted so that overtime pay is treated as normal remuneration and included in holiday pay calculations.
The tribunal ruled on three cases: road maintenance firm Bear Scotland versus Fulton; engineering company Amec versus Law; and industrial services group Hertel versus Wood. The employees won the initial claims and the tribunal rejected the companies’ appeals.
The decision opens the door for workers to claim for extra holiday pay but seemed to limit backdating payments to three months. It is expected the ruling will be appealed.