Following on from our previous notice on the subject (TT204 – Where is my holiday pay? August 22, 2014) a landmark ruling was made by the Employment Appeal Tribunal with regard to the calculation of holiday pay for employees on 4th November.

Prior to the ruling, all full time employees working a five day week were entitled to 20 days paid leave (28 inclusive of bank holidays). The original holiday pay calculation followed a very simple structure; to simply use the employees basic salary and pay them their normal day rate for any holiday days taken. The EU’s Working Time Directive had brought this into UK law in 1998, but the Tribunal ruled that the UK had interpreted it incorrectly.

In future this calculation is to be adjusted to include any regular overtime pay, increasing holiday pay as a result. The Government has already estimated that as many as 5 million workers could benefit from this ruling. This adjustment would only cover the first 20 days of holiday pay, with any additional holiday days given falling outside of the original EU Working Time Directive.

Time limits have been introduced for back-dated payment claims, with no claim possible if more than 3 months have passed since the leave was taken. Unite, who are funding the action, are appealing this point with speculation that they would like claims to go back up to 6 years.

Business Secretary Vince Cable has set up a government task force to assess the impact of the decision and how the Government should respond.

Whilst the workers will be celebrating, the CBI is suggesting that this is likely to cost SMEs “billions” in back payments, plus employer’s National Insurance contributions. Other agencies are claiming many businesses are likely to fold as a consequence, despite having always complied with UK law, through no fault of their own.

It has been widely reported that John Lewis reviewed their own policies back in the summer in preparation for this ruling and have already set aside £40m to cover the potential back payments, such is their concern. Those in the retail, manufacturing, engineering and maintenance industries are especially at risk.

With this likely to drag on through the courts for some time yet, before a final ruling is made and the back payments need commence, it is something that businesses should be considering and making provisions for now. Failure to do so may leave employers facing bills they simply cannot pay, potentially putting their future and the future of their entire workforce at risk, so careful planning and preparation is key.

In the next few months a similar tribunal will rule on how much commission can be included in calculating holiday pay, with a similar outcome now highly possible. This could then mean several other industries suffer a similar fate.

We will keep you informed as more information becomes available.