• Lee Calver
  • 15 July 2014

Holiday pay ruling could cripple British businesses

A recent European Court of Justice (ECJ) ruling on holiday pay has led to business groups calling for the Government to urgently intervene as fears escalate that firms could be hit with costs of billions of pounds.

In the UK, holiday pay 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.

However, a recent ECJ ruling has determined that holiday pay must include an allowance for commission that an employee could have earned if at work.

Businesses are now concerned that if liabilities on holiday pay are backdated, they could potentially face bills of millions of pounds. Following the judgment by the ECJ, the Confederation of British Industry (CBI) has revealed that it has been informed by a number of organisations that backdated claims could force their businesses into insolvency, which would of course result in a large number of job losses across the UK.

Commenting, 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.”

The ECJ’s ruling in the Lock v. British Gas Trading Ltd case means that British workers could have the right to claim for holiday pay and overtime they are owed, going back as far as 1998 under the Working Time Directive, or to an employee’s start date with a company.

Research by EEF, the manufacturers’ organisation, estimated that an SME in the manufacturing sector with a £30m annual revenue can expect to face a bill of £2.5m, with National Insurance and pension contributions adding on a potential £250,000.

Explaining the outrage at the decision, Katja Hall stated:

“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.”

She added:

“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.”

For UK businesses, the possible long-term effects are incredibly significant. Commenting, Workplace Law Head of HR, Suzanne McMinn, said:

“It really is a significant change for EU employment case law, the basic measure for calculating holiday pay is something that the UK has been using for many years and only now has it been challenged in Tribunal. The outcome will mean for some employer’s huge changes which will be costly and a potential administrative nightmare.

“For employers looking to acquire new business or expand headcount through TUPE transfers, this is going to be a big consideration for them as to whether this is a viable position for them now.”

Suzanne continued:

“Just when employers have got their financial heads around Pensions Auto Enrolment and the potential additional costs that come with it, they are hit again with backdated holiday pay claims. 

“Employers are going to have to dig deep if they are going to continue with the benefits that employees are currently enjoying and meet the needs of spiraling holiday costs. This could see a big hit on employee benefits and overtime rates as employers try to find the finances to foot the bill.”

Concluding, Suzanne added:

“This will impact on businesses ability to grow and expand as they had perhaps planned, and the ramifications of this will go well beyond employment issues, with services being hit first as employers try to limit the increasing costs. 

“This also doesn’t sit well for any investors looking at the UK as a possible place to invest in!”

Government action

The CBI has also stated that the Government must 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.

Neil Carberry, CBI Director for Employment and Skills, revealed:

“We are totally convinced the costs will reach billions and in one sector alone they have estimated £750m.

“For individual companies it could reach tens of millions.”

Describing precisely how substantial this could turn out to be, Carberry went onto say:

This is the single biggest employment issue for businesses right now and affects small and medium-sized manufacturers right through to the largest car and engineering plants. It is putting jobs and growth at risk.”

What can employers do?

Offering advice to bosses who currently fear for the very existence of their company, Suzanne said:

“Employers should review their cost base and undertake some thorough investigations into what this could potentially cost in terms of back pay and future holiday pay. Only by reviewing what is needed in terms of the costs will then allow employers to see the full impact and make savings where needed.”

If you are concerned about what this may mean for you, please let us know. We have set up this new forum group to allow employers to discuss their worries and share stories/advice. While you may fear it is only you being affected, there will be numerous other bosses in exactly the same predicament as you. This forum discussion group enables you to explain your situation, compare it to others and hopefully take away some sound advice about where you go next.