Large-scale backdated holiday pay claims unlikely following ruling

The recent ruling by the Employment Appeal Tribunal (EAT) that overtime earnings must be taken into account when calculating holiday pay has alarmed many employers who fear they may now be liable for compensation claims dating back several years.

That, however, doesn’t seem to be the case.

The issue over holiday pay entitlement was raised recently when a sales agent for British Gas claimed he should receive his average commission payments as well as his basic wage.

The case went to court and the judge ruled in favour of the sales agent under the terms of the EU’s Working Time Directive, which was introduced into the UK in 1998.

Since that case, the EAT has stated that all overtime must also be included when calculating holiday pay.

This left some businesses fearing they could face claims from their employees for underpayments dating back 16 years.

However, the EAT has ruled that in most cases, employees will not be able to make claims dating back several years.

If there was a gap of more than three months between an employee’s most recent two holidays, then only underpayments on the most recent can generally be considered. Any underpaid holidays taken before then are considered to be time-barred and so cannot be claimed back. There could be exceptions, if the employee can prove that it was not practical to make the claim earlier.

Under the EU’s Working Time Directive, employees should receive their usual wages when they are on holiday, including any normal overtime and bonuses. Employers should take this into account when calculating holiday payments. The change is expected to increase labour costs by about 4% for UK employers.

The other point to consider is that the ruling only applies to the minimum four weeks’ holiday entitlement under the EU Directive. It doesn’t apply to the extra 1.6 weeks due under UK regulations. The EAT also said that unless there is an employment contract stating otherwise, it should be presumed that the minimum four weeks’ entitlement are taken first, and the extra 1.6 weeks are taken afterwards.

Further developments:

Stop the press. To prevent employees from bringing long-term claims for back holiday pay, either in the tribunal or civil courts the government has now introduced the Deduction from Wages (Limitation) Regulations 2014. The Regulations came into force on 8 January and limit potential claims for unlawful deductions to two years before the date the Tribunal claim is lodged. However, the Regulations don’t apply to Tribunal claims presented before 1st July 2015 therefore employees have 6 months to get any longstanding claims in.

Please contact Jackie Cuneen if you would like more information about the issues raised in this article, or any aspect of employment law.