Holiday pay and pensions: more headaches for employers

Posted: 25/11/2014

The Employment Appeal Tribunal’s decision in the case of Bear Scotland Ltd v Fulton & Others exploded onto the legal scene the day before Guy Fawkes celebrations on 5 November, causing alarm amongst employers in relation to its impact on their costs and their internal payroll processes.  

It was decided that ‘normal remuneration’ for the purposes of calculating holiday pay should include remuneration which is normally received including non-guaranteed overtime payments.

Now the fireworks are over a residual issue is starting to burn for employers, in terms of the impact of the Bear decision on pension benefits provided under their company schemes.

Since 2012 employers have had to get to grips with the Government’s compulsory pension requirements for staff under the new auto-enrolment regime. Employers should be aware that the definition of ‘qualifying earnings’ used in auto-enrolment is wide enough to include holiday pay.

Employers will need to ensure their systems cap copes with factoring in holiday pay as part of qualifying earnings in order to assess their workforces properly. Payments of holiday pay may cause spikes in wages which may mean workers have to be auto-enrolled unexpectedly.

Businesses should also audit their scheme rules, and look at the basis of pensionable pay used to calculate benefits under their schemes. This applies to auto-enrolment schemes and also to other trust based pension arrangements. The risks occur where pensionable pay is broader than basic salary and includes other variable elements like overtime and commission payments.

Where employers operate open defined benefit schemes then this issue could lead to further unfunded liabilities for them under the scheme, and they should seek advice.

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