Pensions client update: changes to holiday pay – are there pensions implications?

Written on 20 Nov 2014

A recent decision affecting how much employers must pay to their workers while they are on holiday could also have pension implications.

The ruling on holiday pay

The Employment Appeal Tribunal (EAT) confirmed that to reflect European law workers should receive holiday pay which reflects their ‘normal remuneration’. This decision dealt with regular non-guaranteed overtime (being overtime that an employer may offer and, where it does so, the worker is required to undertake it). The EAT confirmed this overtime was normal remuneration and should be reflected in holiday pay. The decision also has wider ramifications potentially meaning that employers should now be reflecting other regular payments and allowances in holiday pay e.g. voluntary overtime, commission payments, shift premium, on-call allowances and travel allowances. At the moment most UK employers base holiday pay on the strict reading of the statutory formula which limits it in most cases to basic salary.

The decision only strictly applies to the four weeks statutory holiday provided by European legislation, and not to the extra 1.6 weeks above this that UK workers are legally entitled to. Whilst this is significant for employers managing historic holiday pay claims, going forward in practice many employers may treat all statutory holiday the same for administrative reasons, although this will depend on the payments involved and the nature of the business.

For further detail please see our employment update.

Pension implications

This ruling could also have pension implications:

  • Defined benefit schemes that have members who receive regular payments in excess of basic pay could be affected. Trustees and employers in this situation should seek advice on the steps required. The specific implications will depend on the drafting of the scheme documents, including definitions of pensionable salary, earnings, remuneration or other similar terms, and the nature and circumstances of the additional payments made in excess of basic pay.
  • Defined contribution schemes could also be affected, depending on what aspects of ‘pay’ pension contributions are expressed to be deducted from. Employers (and trustees if relevant) should consider whether schemes are affected, and may need to take steps to ensure that the correct levels of contributions are being made.
  • For workers who are just on the cusp of the qualifying earnings threshold for automatic enrolment, an increase in their holiday pay could push them over the threshold. Employers with workers who receive payments in excess of basic pay will need to consider whether their processes for monitoring whether workers qualify for automatic enrolment need to be changed to take into account higher holiday pay as a result of this decision, and may find that more workers end up needing to be automatically enrolled than they had anticipated.

What next?

The EAT has given leave to appeal the decision, which means that the legal position could still change. However the court expressed its view that the appeal had the most prospect of success in relation to retrospective claims for under-paid holiday pay, the potential for which the current decision significantly limited, stating that claims would be out of time if there has been a break of more than three months between successive underpayments.
It appears less likely that the principle that holiday pay must include non-guaranteed overtime and potentially other regular payments and allowances will be changed. Another case indicating that commission needs to be included in holiday pay is also due to be heard by the employment tribunal in February 2015.

Employers and trustees with workers and members who have additional elements to their pay over and above basic pay would be sensible to start reviewing the implications that these decisions have for their pension schemes and automatic enrolment processes, and to make potential provision for additional payments required. There is also the possibility of needing to amend the position retrospectively, but the extent to which this will be necessary will not be fully understood until the appeal decision has been given.

The government has also set up a taskforce to assess the impact of the ruling and to limit its impact on business, and resulting government intervention therefore has the potential to further affect the position on these issues.