Government announcement on holiday pay

Written on 19 Dec 2014

The Government has announced (see here) that it is introducing regulations (see draft here) to limit a claim for holiday back-pay, made via the unlawful deduction of wages provisions, to two years. However, whilst helpful in some cases to limit historic exposure to claims, employers must now review their holiday pay practices as a priority going forward.

The Employment Appeal Tribunal (“EAT”) found in November that the holiday pay calculation provisions in the Working Time Regulations 1998 (“WTR”) did not reflect the requirements of the European Working Time Directive (“WTD”) and that the WTR should be interpreted to accord with the WTD (see here). This has left many employers in the position of having potentially paid holiday pay incorrectly in the past (albeit consistent with the black and white wording of the WTR) leaving them vulnerable to claims going forward and historically.

Key points:

  • 1 July 2015 is a critical date in the Government’s announcement. It is only claims made on or after this date which will be subject to the 2 year limitation.
  • Individuals may still therefore bring claims for back dated holiday pay before 1 July 2015 which seek to claim back pay going back beyond 2 years.
  • It is important not to forget that the EAT’s recent decision already limited historic holiday pay claims by finding that:
    • any gap of more than three months between alleged underpayments would break the “series” of unlawful deductions for an unlawful deduction of wages claim. This essentially time-limits claims for historic underpayments to when the series was broken and should in many cases mean that a historic claim does not extend back over what may be a significant period of time. Unison have stated that they will not be appealing this point (although the finding could still be challenged via another claim).
    • it is only the calculation of holiday pay for holiday originating from the WTD (i.e. 20 days) that is in issue and not the additional 8 days provided in the WTR by the UK Government (or any contractual holiday over and above that). This again helps break the series. In many cases the 20 days WTD holiday will usually be the first holiday to be taken in any holiday year and the gap between the last WTD holiday in one year and the first WTD holiday in another may well be longer than 3 months (albeit other statutory and contractual holiday has been taken inbetween).
  • An individual may still seek to argue that he/she has a contractual claim in respect of historic underpayments extending back beyond 2 years. However, such a claim would face a number of legal difficulties in getting off the ground, a view shared by commentators on this topic. Going forward the Government’s proposed draft regulations appear to confirm that holiday pay under the WTR does not confer a contractual right (subject, of course, to the provisions of the contract).

It is worth noting that the Government’s proposed draft regulations making this change are not just restricted to holiday pay.  They appear to apply this 2 year rule to any claims for fees, bonus, commission, holiday pay or other emoluments referable to employment (whether payable under the contract or otherwise).  Further, commentators in this area are already questioning whether the Government can make the changes in the way it is proposing so we may see further developments yet.

What do employers need to do?

  • With many employers approaching the end of their holiday years, now is a key time to review your holiday pay practices and make appropriate changes going forward. Whilst the Government’s announcement is helpful, it does not change the fact that the issue of holiday pay is not one that is magically going to disappear and employers need to take steps to limit the risk of future claims and mitigate against the risk of historic claims.
  • Indeed, it will still be possible for an individual to bring separate claims for holiday periods going forward, thereby circumventing the 3 month “break” rule introduced by the EAT. Each claim for underpayment would be a claim in its own right (or part of a shorter series reflecting breaks of less than 3 months). Last week the Presidents of the Employment Tribunals of England & Wales and Scotland, issued a practice direction indicating in essence that an existing claim for holiday pay could be amended to reflect subsequent claims thus averting the need for an individual to pay an ET claim fee or go through the ACAS early conciliation process each time.
  • There are still however unfortunately a number of grey areas in how holiday pay should be calculated correctly. Please do speak to your usual OC Contact who can guide you through this. We also have an online holiday pay tool to alert you to where your current practices may pose a risk.
  • Continue to keep a watch on developments.  The case of Lock dealing with commission and holiday pay is due in the Employment Tribunal in February and may provide some welcome clarification on how commission should be reflected in holiday pay.  We may also not have heard the last of this yet from the Government, with its announcement expressly stating that the Government’s holiday pay taskforce are still working through the implications of the recent court rulings.

As many employers approach the end of their holiday year now is a key time to take steps to resolve any holiday pay issues. Please do contact your usual OC Contact to discuss the above further.