Holiday Pay – 2 year backstop on claims

Our law now in November covered the landmark ruling in Bear v Fulton which ruled that non-guaranteed overtime should be included in holiday pay calculations (find the update here). The Government set-up a taskforce to review the impact of large backdated holiday pay claims on UK businesses and, on 8th January 2015, the Deduction from Wages (Limitation) Regulations 2014 came into force.

These Regulations amend the Employment Rights Act 1996 to limit back-dated claims for underpayment of holiday pay to two years. While Bear made it clear that any claim would be out of time where there had been a gap of more than three months between one underpayment and another, this still left the possibility of claims stretching back for many years where there had been no break in the ‘series’ of underpayments. These Regulations provide a long stop date of 2 years in respect of specific claims for unlawful deductions from wages, in particular, complaints that holiday pay has been miscalculated.

This two year limit on claims will only apply to cases presented to the employment tribunal on or after 1st July 2015. Until that date, there remains scope for claims for underpayments of holiday pay to go back much further; however this will depend on the circumstances. Between now and 1st July it remains to be seen whether workers will rush to submit claims prior to the limitation period coming into effect, which seems more likely where there has been Union involvement.

The Regulations also amend the Working Time Regulations 1998 so that the right to be paid a ‘week’s wages for a week’s holiday’ is a statutory right only, not a contractual right to be incorporated into employment contracts. The practical effect of this change is that holiday pay claims can only be brought as statutory claims in the employment tribunals, not as breach of contract claims in the civil courts (where the limitation period would be six years in England & Wales and five years in Scotland).

Whilst the Government’s intervention goes some way to mitigate the effects of the decision in Bear, there remain unanswered and complex questions surrounding holiday pay that still need to be resolved by the courts and tribunals. For example, should truly voluntary overtime and/or bonuses be incorporated into holiday pay and is the 12 week reference period correct for the purposes of determining a week’s pay? We expect to see many more holiday pay cases launched in the coming months.

This topic presents real challenges for businesses and the correct approach will ultimately depend on particular circumstances. We recommend taking legal advice before finalising holiday pay strategy. If you wish to hear more about holiday pay then please come along to one of our Round-Up events. We are delighted to be joined by Caspar Glyn QC who will be sharing his thoughts on holiday pay. The events are being held in Aberdeen, Edinburgh, Glasgow and London at the end of January in Scotland, and on 4 February in London. (Click on each location for more information and details on how to register.)