Paying employees for their annual leave in the UK used to be viewed as a straightforward process, with many companies calculating holiday pay at the employee’s basic pay rate.

However, in 2014, several employment law cases raised the issue of whether, during annual leave, employees should also receive an amount in respect of overtime and commission. One case indicated that even non-guaranteed overtime needed to be included in holiday pay if the overtime and commission were part of “normal remuneration”. In essence, if an employee regularly undertook overtime work, then they should expect to receive the same level of remuneration while away on holiday.

These cases created significant concerns for UK businesses as several trade unions began to encourage further claimants to come forward to claim for backdated overtime as part of holiday pay. For large companies with a workforce that regularly commits to overtime, the liabilities could have been crippling.

For this reason some private equity sponsors and buyers started to consider seeking indemnity protection from sellers or reductions in purchase prices to account for this risk. Now, however, the concerns surrounding this issue have been broadly assuaged. Government policy and several cases in 2015 suggest that the anticipated stampede of claimants seeking backdated overtime pay for holiday periods will not materialise and any future claims will be much more limited than previously feared. Also, the unions have largely gone quiet on the issue.

Even so, private equity sponsors should still be aware that additional overtime payments to be included in holiday pay will add to a target company’s running costs. Further, as possible holiday overtime claims have only recently come into focus, such claims are unlikely to be included in a target’s accounts, so additional diligence on any potential liabilities will be required. Nevertheless, the outlook on this issue has certainly improved from earlier in the year.