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Wed July 15 2020

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Holiday pay ruling could be death knell, warns civils contractor

8 Jul 14 Businesses are facing the risk of billions of pounds of additional costs from a recent legal ruling relating to holiday pay.

And it has at least one civil engineering contractor fearing for its very existence.

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 massive unexpected bills.

Civil engineering contractor Owen Pugh Group, a medium-sized business based in Northumberland, fears it is under threat. Chairman John Dickson 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.”

He added: “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 issue has been picked up the lobby group Confederation of British Industries (CBI). Other medium-sized businesses have also told the CBI that backdated claims could push their otherwise profitable businesses into insolvency.

CBI deputy director-general Katja Hall said: “Backdated claims on holiday pay could lead to bills of millions of pounds for each business, and ultimately threaten their very existence.

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“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.”

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 CBI is calling on the government to defend the existing UK law as these rulings go beyond what could have been foreseen when the working time rules were introduced. The EU treaty is supposed to leave matters of pay with member states, it says.

Cases on commission and overtime are currently proceeding, meaning major uncertainty for businesses. The CBI is calling for the government to use its powers under British law to limit the retrospective liability firms’ face. 

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