Holiday Pay - An Update

United Kingdom
Any new holiday pay claims brought before an Employment Tribunal can now only cover a period stretching back 2 years from the date on which the claim is made. This is as a result of the Deduction from Wages (Limitation) Regulations 2014 (the Regulations), which impose the limit on any new holiday pay claims raised from today onwards. Separately, a recent case from the Northern Ireland Court of Appeal (Patterson v Castlereagh Borough Council) suggests that voluntary overtime may – in some circumstances – have to be included in holiday pay calculations.

Two year limit for claims

The Regulations were brought into force following the decision of the EAT in Bear Scotland v Fulton (UKEATS/0047/13). Although this case held that compulsory overtime payments must be included in holiday pay, it did not clarify how far back retrospective holiday pay claims could stretch. As noted in our earlier Law-Now (see here) the UK Government stepped in to address this point, with the 2 year restriction now applying to all unlawful deduction of wages claims for “any fee, bonus, commission, holiday pay or other emolument referable to [an individual’s] employment, whether payable under [an individual’s] contract or otherwise.” The Regulations therefore impose the 2 year limit not only on holiday pay, but on most unlawful deductions claims. However, claims in relation to statutory sick, maternity, paternity and adoption pay remain unaffected; as do holiday pay claims that are already in the Tribunal system.

The Regulations also expressly provide that the Working Time Regulations 1998 do not confer a contractual right to paid annual leave. This means that individuals cannot subvert the 2 year restriction by raising holiday pay claims as breach of contract claims in the civil courts (where significantly longer prescription and limitation periods would apply), instead of as unlawful deductions claims in an Employment Tribunal.

A 6 month transitional period since the Regulations entered into force in January 2015 has given prospective claimants plenty of time to submit their claims before the 2 year restriction period became “live” today. Indeed, there are now 21,000 holiday pay claims in the Scottish Tribunal system alone. That said, the decision of the EAT in Bear, that a gap of more than 3 months between underpayments breaks a chain of deductions, has meant that most retrospective holiday claims will not extend as far back as first thought. It may be that the 2 year restriction therefore does not have as significant an impact as first anticipated.

Voluntary overtime

The Northern Ireland Court of Appeal has just held that there is no reason why voluntary overtime cannot be part of an individual’s normal working week and therefore could be included in holiday pay calculations.

However, the decision does not necessarily mean that voluntary overtime must be included in holiday pay calculations in all circumstances. The judgment does not provide guidance on what constitutes a “normal working week”, with the Court instead suggesting that this will likely depend on the facts and circumstances of each case. Arguments are now likely to focus on whether voluntary overtime was normal and regular enough to form part of the normal working week, and thus be included in holiday pay calculations.

As a Northern Irish case, the judgment is not binding on courts and tribunals in Great Britain. However, judges are likely to view it as highly persuasive authority, given that it is the first appellate court judgment on the specific issue of voluntary overtime and holiday pay in the United Kingdom.

Although the calculation of holiday pay is becoming clearer, it is still not settled and we await further cases with interest. In the meantime, employers should continue to proceed with caution and seek advice when necessary.