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Firms could face new pensions bills after holiday pay ruling

Firms could be forced to pay extra pension contributions as a result of the landmark ruling on workers’ rights to holiday pay.

Earlier today, the Employment Appeal Tribunal ruled in two separate cases that firms were wrong to exclude two employees’ overtime payments when calculating holiday pay.

Law firm Pinsent Masons says the decision should sound “alarm bells in boardrooms” and could impact pension schemes where variable pay is included in pension contributions.

Head of pensions Carolyn Saunders says: “The decision could affect those pension schemes that include variable elements, such as bonus and commission, in the pay that is used to calculate benefits and contributions. 

“There will be no impact on schemes that use only basic pay to do this. Both defined benefit and defined contribution schemes could be affected.  The administrative costs of sorting out the past underpayments could be significant.”

The tribunal said the Working Time Directive – an EU rule that sets working rights – could be interpreted so that overtime pay is treated as normal remuneration and is to be included in holiday leave calculations.

Both the CBI and IoD warned the cost of implementing the ruling could run into billions of pounds and force some companies out of business.

CBI director-general John Cridland says: “This is a real blow to UK businesses now facing the prospect of punitive costs potentially running into billions of pounds – and not all will survive, which could mean significant job losses.

“These cases are creating major uncertainty for businesses and impacting on investment and resourcing decisions.

“This judgment must be challenged. We need the UK Government to step up its defence of the current UK law, and use its powers to limit any retrospective liability that firms may face.”


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There are 10 comments at the moment, we would love to hear your opinion too.

  1. So the idiots who made this ruling think that by going on holiday employees should be entitled to a portion of overtime pay when they do not work the overtime due to being on holiday? WTF???? Next thing you know there will be a claim put in for employees who are off sick being “entitled” to overtime pay on the sick pay scheme as they could have been working overtime except that they were off sick. Give me a break… This country has finally gone totally to the dogs. So many people trying to get extra money for sweet FA. Never mind the pension side of things. Companies will fold, job losses will be abundant but its ok because those that are left will be abiding by the EU Working time directive. Another classic example of bureaucracy gone bananas.

  2. Retrospection everywhere. However why the shock? AE requires this anyway – what joy! What not just take the average overtime over the past year as a percentage of the standard working week and let them have this percentage as extra holiday?

    How much heavier does the government and the lawyers want to make the burden on employers?
    Gender equality
    Maternity leave for goodness how long
    Maternity leave for men!!!
    Compulsory pensions.
    Now holiday pay on overtime
    Not forgetting NI, Elf and Safety and all the other hoop-la. No I’m not saying you shouldn’t pay a decent wage, treat staff well and provide a safe and congenial working environment – but the bargain seems to be very slanted. How about the best interests of the firm? After all the firm needs to stay healthy to pay all this stuff.

  3. Well said Marty and Harry.

    I used to think we lived in a Nanny State. I’m now revising that view because, in days gone by (I’m thinking Mary Poppins here) all this would have been considered “stuff and nonesense”.

    As a nation we are losing our stoicism and rather than “putting on a brave face”, having a “stiff upper lip” and “rising above it” – we can sue (someone) if we don’t get what we want and we can expect something for nothing and the EU will protect everybody’s “rights”.

    We might as well be communists…….

  4. Marty – I am not sure this is all about ‘So many people trying to get extra money for sweet FA’ as you put it – I think it is less aimed at those that are working a 35-40 hour contract and earning a living wage whilst chipping in with the odd couple of hours overtime here and there when needed and more aimed at those who are on a 20-25 hour contract and having to regularly work an additional 10-15 hours per week just to make up their income – if it can be proven that these additional hours are being undertaken then surely it is fair that the employee is entitled to the benefits of working those hours? After all the employer only has them on a reduced hour contract so that they will avoid having to pay the employee benefits whilst knowing that the employee will have to work the additional hours to makes ends meet.

  5. Marty: The issue here is people who are *required* to do overtime as part of their job.

    If I work 9-5 in an office for 35 hours a week, and my mate does 35 hours of shift work a week including 8 hours overtime, and that overtime isn’t voluntary, then I don’t see why he shouldn’t get the same holiday pay as I do.

    The story has been inevitably misreported and misheadlined to imply that it might apply to voluntary overtime.

  6. Without reading the case details it is difficult to know if this is an issue or not.

    It has always been employment law that where regular overtime is done this becomes part of your contract of employment; so I don’t see why holiday pay and pensions shouldn’t be linked to it in the first place. Mind you most contracts of employment are very specific as to what counts as base pay etc. so it is interesting to see which stands up in court.

    What doesn’t make sense is if this includes occasional overtime – can you imagine the cost of administering that!

  7. Thank goodness I sold my business in 2008. I had had enough of all the stupidity of all the rules and regulations as Harry above says. At 52 I thought I would take a year or so off and do another business. 6 years later and I am still having a great time, and can thoroughly recommend retirement. No stress, no stupid rules, no worries about falling foul of the law, no fears of being prosecuted if I make a mistake. If you can afford it get out.

  8. Europe is trying to make us as uncompetitive as they are. This involves those in work having lots of benefits and guaranteed rights. The problem is it means very large numbers of people not being in work as the employers cannot afford to employ them (and if employed they cannot get rid of them). Retrospective application of laws is always silly if those employers following custom and practice at the time would have been unable to realise they were likely to be found in error.

  9. Mr Botham, in your response to Marty I understand your view of it, but how does that work in practice? Are you saying that the ruling only applies to Part-Timers who actually do a ‘Full-Time’ working week. I haven’t seen that in the legislation, so those working a ‘Full-Time’ week and doing +20 hours O/T are also included…

    This ruling is just another potential nail in our EU relationship… Soon it won’t pay to be a budding entrepreneur and provide secure jobs for others…

  10. and why not

    Its a race to the bottom

    Average UK wage for 99% of population is £23,496
    Average wage of top 1% is £368,000

    In the space of 4 years to 2011, each of the UK’s 100 top paid CEO’s had their wages increased by the amount of what ten average people are paid each year.

    Collectively they took 1,000 peoples average pay just in their additional bonuses – which were on top of the sum equaling 9,200 times average pay which, between them, they took, in effect as their basic salaries.

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