M&A diligence: hidden holiday pay
The Employment Appeal Tribunal last week gave its decisions in a number of cases including AMEC Group Ltd v Law EAT/0161/14 and related appeals, ruling that workers… Read more
The Employment Appeal Tribunal last week gave its decisions in a number of cases including AMEC Group Ltd v Law EAT/0161/14 and related appeals, ruling that workers are entitled to have voluntary overtime included in the calculation of their holiday pay.
The claimants pleaded that they consistently worked overtime but that extra remuneration was not factored into their holiday pay, meaning they received “considerably less” pay when on holiday compared to when they were working. The decision comes as a blow to employers, with affected companies facing the real prospect of having to backdate holiday pay to staff. There is also a concern that businesses will be forced to change or even scrap overtime provision altogether, and may freeze or reduce wages to compensate for the financial implications of the decision. According to government figures, around 15-20% of people in work are currently paid overtime, which equates to around five million workers.
The key messages from the ruling are that workers must be paid “normal remuneration” during the holiday to which they are entitled under EU law (i.e. typical average pay rather than basic pay only), so employees whose holiday pay is calculated by reference to basic pay only may have claims for unlawful deductions from wages. Crucially for employers, the ruling limited any potential liability by clarifying that if there is a gap of more than three months in any series of deductions, the Employment Tribunal will not have jurisdiction to hear claims relating to holiday pay before that gap.
Purchasers looking at potential targets which are rich in human capital should consider whether this decision increases the liability of the target company or business. Though the EAT has substantially limited the impact of its decision on employers by narrowing the Employment Tribunal’s ability to hear claims where the series of deductions is interrupted, purchasers may acquire the relevant company/business in a period where overtime should be reflected in holiday pay.
For more information, please contact Andy Moseby.
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