Case law: Government limits employees' claims for back holiday pay

Wednesday 11th February 2015

Case law: Government limits employees' claims for back holiday pay

 

Employers will welcome new rules limiting employees' ability to bring long-term claims for back holiday pay in the ET and the civil courts, following three landmark rulings.

 

The new 'two-year rule limits an employee's ability to claim unlawful deductions of wages (except in relation to certain claims, such as maternity, sick and guarantee payments) that took place more than two years before a claim is made to the Employment Tribunal, provided the claim is lodged on or after 1 July 2015. Under the new rule, the right to paid holiday is not incorporated as a term in employment contracts.

The two-year rule reduces the impact on employers of recent rulings that said employers must pay their workers holiday pay at the same rate as their 'normal pay'. The underlying principle is that workers should not be paid less than normal just because they are on holiday.

 

In a previous case, the European Court of Justice ruled that 'normal pay' included all elements of pay that are 'linked intrinsically to the performance of the tasks which the worker is required to carry out under his contract of employment'.  The UK Employment Appeal Tribunal has therefore ruled that 'normal pay' included payments for regular, settled, but non-guaranteed overtime so that such payments should be taken into account when calculating holiday pay. However, it also decided:

 

  • This only applies to the four weeks of the worker's annual leave required under the EU Working Time Directive (20 days for a full-time worker). There is an assumption that this part of the worker's annual leave is taken first. It does not apply to holiday pay for the additional 1.6 weeks (eight days for a full-time worker) of annual leave also required under the UK Working Time Regulations (or to any additional contractual annual leave), which continues to be calculated by reference to basic pay.
  • Workers claiming to have been underpaid holiday pay must have been underpaid within the three months before they lodge a claim. Any claim is for unlawful deduction from wages.
  • If they are claiming a series of underpayments, claims for previous underpayments will not succeed if there is a break of more than three months between underpayments. This will mean most workers can only claim underpayments for their most recent holiday.

 

Another UK decision said that normal commission payments should be also included when calculating holiday pay. This issue has been referred back to the Employment Tribunal to decide how employers should make this calculation.

 

In addition to the three-month limits referred to above, the new two-year rule now also ensures that, for claims brought after 1 July 2015, no employer can be asked to compensate employees for unpaid holiday pay that goes back more than two years. This is a welcome limit for employers who pay significant overtime but did not factor this into holiday pay, as they might otherwise have faced claims for back holiday pay.

 

Operative date

  • Now

Recommendations

  • Employers should:
    • Identify workers who regularly work overtime, or receive commission or other job-related allowances; ensure workers' holiday dates are accurately recorded; work out how far back each worker may be able to claim underpaid holiday pay (both under the new 'two-year' rule, and because claims are blocked if there has been a three-month break between holidays); and budget accordingly.
    • Consider reducing overtime to minimise future holiday pay.
    • Consider whether to continue to pay lower holiday pay in relation to the eight days' of annual holiday under the Working Time Regulations compared to the 20 days' holiday under the Working Time Directive – effectively introducing 'two-tiers' of holiday pay.
    • Consider whether their systems (including any payroll software) can cope with this.
    • Take specialist legal advice if in doubt.

Case refs:       Bear Scotland Ltd & Others v Fulton & Others UKEATS/0047/13/BI

Hertel (UK) LTD v Woods & Others UKEAT/0160/14/SM

Amec Group LTD v Law & Others UKEAT/0161/14/SM

 

 

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