On 4 November 2014, in a flurry of media excitement, the Employment Appeal Tribunal (EAT) ruled that holiday pay needs to take overtime into account.

This EAT decision followed a judgment by the European Court earlier this year which stated that holiday pay must reflect "normal remuneration". As a result, if sums which an employee receives whilst at work are not replicated when they are on holiday, this will be a breach of EU law.

The EAT decision is particularly relevant for companies seeking to purchase businesses or assets as such transactions will trigger certain employee protections under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended) (TUPE). Where TUPE applies, past holiday pay liabilities will transfer to the new employer.

Similarly, employers who, by way of corporate purchases, are inheriting staff who are paid commission, overtime and even bonuses, should make sure that they fully understand what they are taking on, both in terms of potential backdated claims, and, whether there will be the need to recalculate holiday pay going forward. This extra liability may of course have an impact on the pricing of a business or the costs of the services to be provided.

Much of the reason for the media hype was the fear that this could generate backdated claims for underpaid holiday pay going back to 1998, costing employers millions. Whilst these fears have mostly been allayed by the EAT's decision to restrict the ability for employees to bring claims for holiday pay from previous years, the risk remains that the decision, particularly in relation to this employer-friendly restriction on back-pay, may be overturned if appealed.

A Government task force has been created to consider the impact of the EAT case on employers and we await to hear whether the judgment will be appealed.

The risk of underpaid holiday arises not just in relation to overtime. In the European Court case earlier this year it was decided that holiday pay must account for commission also. There remain questions over how you calculate holiday pay in relation to commission, but this will be litigated before the Employment Tribunal in the New Year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.