Holiday Pay Claims

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You won’t have missed the headlines in the newspapers announcing that workers can sue their employers for £millions in holiday backpay claims, going all the way back to the 1990s.

In the UK, we normally calculate holiday pay based on a worker’s basic salary – but we don’t normally include overtime, commission or similar payments. A series of recent judgements have made it clear that European laws (which normally trump UK laws) require employers to factor in overtime and commission payments – and anything else a worker would normally receive if they were working – so they are not dissuaded from taking holiday by being paid less when on holiday than when at work.

But the newspapers have missed out two crucial points, and the government has also just intervened to limit the impact on employers.

First, this higher holiday pay rate only applies to the first four weeks’ paid holiday each year (for technical reasons). The employer can continue paying basic salary for any additional annual leave (although note the rules are slightly different if the employee doesn’t have normal working hours).

Second, employees are very unlikely to be able to bring large, historic back pay claims. The court decision makes it clear that if there is a three month gap in holiday underpayments (as we expect there will be in most cases),  then the employee cannot claim further back in time. So the reality is this affects holiday payments going forward, but employers are not as likely to face large backpay claims as the publicity suggests.

In any event, the government reacted rapidly to the court decision and has brought in new legislation to limit the impact on employers.

The Deduction from Wages (Limitation) Regulations 2014 limit holiday pay claims to two years before the date of the employee’s ET1 claim form. The Regulations apply to all unlawful deductions claims, with some exceptions – claims for SMP, SSP and guarantee payments, for example.  The Regulations also make clear that the right to holiday pay is not incorporated as a term in employment contracts, preventing claims in the civil courts.

While employers may be breathing a sigh of relief, there is currently a window of opportunity for astute employees to take advantage of a brief transitional period. The Regulations only apply to ET1s presented on or after 1 July 2015. So there is some potential for claims, stretching back longer than two years, to be issued now. However, Claimants would need to clear the hurdles put in place by the recent court decision and show a series of deductions, which isn’t as easy as it sounds.

Nevertheless, all employers need to review their holiday pay arrangements. If you’re not sure about the implications for your business  contact our employment specialist Matthew Finley now on 01282 433241. Alternatively, submit on online enquiry and we will be in contact with you shortly.