Independent retailers will now have to include overtime when they calculate their workers’ holiday pay, following a ruling by the UK Employment Appeal Tribunal (EAT).

The EAT decision means that the UK falls into step with European Court of Justice rulings, which require the holiday pay rate to factor in an employee’s regular extra-salary payments, such as non-guaranteed and compulsory overtime.

While the decision is set to cause an increase in retailers’ running costs, there is some relief for employers with the tribunal clarifying that employees willnot be able to make substantial backdated claims, but only claim underpayment of holiday pay based on their earnings within the past three months.

Association of Convenience Stores chief executive James Lowman said the EAT decision still left many questions unanswered. He said: “Retailers shouldn’t be too affected by the scaremongering in some parts of the media.  The two things we know are that from now on retailers should include overtime in holiday pay, and that staff may make claims for non-payment of overtime in holiday pay for the past three months.”

The details of the holiday pay decision may yet be changed, given the EAT has permitted the matter to go to the Court of Appeal. John Walding from the Forum of Private Business said:

“Our advice to businesses is not to panic, however, it would be advisable to undertake an audit of how overtime is currently used in the business in order to assess the extent to which the EAT decision could impact on your circumstances.”

Overtime decision: In detail

• Does the UK Employment Appeal Tribunal ruling apply to voluntary overtime?

No. Although there could be further debate over whether overtime is voluntary or not.

• What does the ruling to include overtime for holiday pay apply to?

It only applies to the first four weeks (including bank holidays) of holiday taken in each holiday year. The remaining 1.6 weeks’ holiday (as required by UK law) or any additional contractual holiday can be based on normal remuneration, excluding overtime.

• How can I minimise the financial impact on my business?

You should review your contracts and processes, including changing contracts to provide for voluntary overtime.