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Changes in UK holiday pay could prove costly for businesses

Published on: 24 Jul 2014

Holiday pay

Businesses are facing the risk of significant additional costs – potentially billions of pounds – and a threat to their very existence from tribunal cases challenging the normal calculation of holiday pay under the Working Time Regulations (WTR). That’s according to the CBI, the UK’s biggest business group.

Holiday pay in the UK is currently calculated on the basis of a “week’s pay” – based on basic salary and excluding payments such as working allowances, expenses, overtime, commission and bonus payments, all of which refer to specific work done by someone while performing their duties. A recent European Court of Justice (ECJ) judgment redefined holiday pay to include an allowance for commission, despite the fact that commission is paid on sales made and the employee would not have delivered those sales while on holiday. If liabilities on holiday pay are backdated, individual firms may face bills of tens of millions of pounds. Some medium-sized businesses have told the CBI that backdated claims could push their otherwise profitable businesses into insolvency, resulting in significant job losses.

Katja Hall, CBI Deputy Director-General, said:

“Backdated claims on holiday pay could lead to bills of millions of pounds for each business, and ultimately threaten their very existence. Businesses that have done the right thing and fully complied with UK law suddenly face the threat of substantial additional costs. And the companies most at risk are in vital sectors for our economy, such as manufacturing, construction and civil engineering.

Moving the legal goalposts in this way is unacceptable. Although most businesses believe we are better off in a reformed EU, there is a real danger of expansive decisions being made by the European Court of Justice on the UK labour market. As part of an EU reform programme, this has to be addressed and it’s time to put a stop to back-door EU employment law being made. 

We need the UK Government to take a strong stand and do all it can to remove this threat. Otherwise we face the very real prospect of successful firms in this country going out of business, with the jobs they provide going too.”

Owen Pugh Group, a medium-sized business based in Northumberland and operating in the civil engineering contracting industry, is one company that could be under threat.

John Dickson, Group Chairman of Owen Pugh Group, said:

“Changes to the method of calculating holiday pay in the future have cost and administration implications which are difficult but bearable. But if these changes are applied retrospectively, whether over six or 16 years, they are little short of catastrophic. Like many medium-sized, privately-owned businesses, we will struggle to survive. If it happens, all I can see for the next few years is a collapse in investment, spiralling job losses and a huge rise in insolvencies.”

The ECJ’s ruling in the Lock v British Gas Trading Limited case means that, depending on the subsequent ruling from UK courts, employers may have to change the way they calculate holiday pay to take account of commission payments and could face retrospective claims relating to earlier periods of annual leave, with the potential of going back six years or possibly even as far back as 1998. UK businesses are currently facing an anxious wait to see how the UK courts interpret the ECJ decision on commission, and on the outcome of related tribunals on how holiday pay should be calculated to account for overtime. Other related issues such as backdated tax and pension contributions could also be raised.

The potential long-term effects of any changes are hugely significant and include reduced ability to deliver major infrastructure projects, loss of overtime for staff and a negative image for the UK as a place to invest. The CBI says the UK must resist these expansive judgments, and the Government needs to vigorously defend the existing UK law as these rulings go far beyond what could have been foreseen when the working time rules were introduced, and do not respect the EU treaty – which reserves matters of pay to the Member States. Cases on commission and overtime are currently proceeding, meaning major uncertainty for businesses. The CBI is calling for the Government to step up its engagement with the cases to defend the current UK law, and to use its powers under British law to limit the retrospective liability firms’ face.