Holiday pay claims: new limits on how much employees can claim

New regulations come fully into force today to impose a two year limitation on unlawful deductions from wages claims in respect of holiday pay.

This effectively means that employees who believe that they have been underpaid can claim deductions stretching back no more than two years from the date of the presentation of the claim. 

The new Regulations are the outcome of the work of a Government ‘taskforce’, set up following the EAT decision in Bear Scotland Ltd and others v Fulton and others, which held that some overtime payments should be factored into the calculation of holiday pay.

They are intended to limit the impact of this decision on employers and may significantly reduce your exposure to risk. The new rules at least provide some clarity in this confusing area.

The detail

The Deduction from Wages (Limitation) Regulations 2014 came into force on 8 January 2015. However, there was a six month transitional period in place before the rules took full effect.

The new rules on limitation will apply to all claims presented on or after 1 July 2015. Claims presented before that date will be subject to existing rules on limitation.

Previously, claims for unpaid holiday could be made stretching back six years, or theoretically even as far back as 1998 (when the Working Time Regulations, which govern the statutory right to paid holiday, came into force). In practice though, it would be very difficult for most employees to establish such an extensive historical claim.

The new Regulations also explicitly close off the possibility of contract claims for holiday pay arising from the Working Time Regulations. The new Regulations amend the Working Time Regulations to make it clear that entitlement to paid holiday is not to be considered a contractual entitlement.

Are other claims for wages affected?

The new two year limitation period does not extend to all unlawful deduction from wages claims. However, whilst is aimed specifically at holiday pay claims, it is likely to have a much wider application.

Claims for statutory sick pay, maternity pay, paternity pay, shared parental pay, adoption pay guarantee payments and a number of other statutory payments should remain unaffected. The Government acknowledges that, theoretically, claims for underpayment of the National Minimum Wage will be captured by the new regulations. However, employees tend to use alternative means to recover payment (e.g. enforcement through HMRC).

However, the way the new Regulations are written means that the default position is that any other standard claim for unpaid wages will also be caught by the two year limitation.

What does this mean for me?

The Government states that the new Regulations will ‘reduce potential costs to employers and give certainty to workers on their rights on holiday pay’.

They will certainly be welcomed by those employers who feared that they might face extensive historical liabilities for arrears of holiday pay. The new Regulations will certainly make it easier to establish the risks faced by your business and to budget for a ‘worst case scenario’.

It was felt that a six month transitional period ‘represented the best possible balance’ between reducing costs for employers and permitting workers to make legitimate claims. When the rules were announced there was concern that the transitional period might simply ‘bring forward’ claims from employees looking to avoid the two year back-stop. You may have seen claims entered against your business, or experienced an increase in claims, in the transitional period. However, the Government’s impact assessment concludes that the future certainty on liabilities introduced by the new rules will still represent a net benefit for employers.

If you are currently negotiating with employees regarding holiday pay issues, these new rules place you on firmer ground and may make it easier to manage employee expectations and reach agreement.

The change in the law to explicitly state that the right to paid holiday under the Working Time Regulations is not contractual means that a claimant will be expressly prohibited from pursuing a holiday pay claim in the civil courts unless they have a separate, free-standing breach of contract claim (for example arising from the wording of their contract or a collective agreement incorporated into their contract). On our analysis, this simply reflects the position under current law.

Comment

While the new Regulations are welcome news to most employers, many commentators query whether new statutory provisions are really necessary. The Bear Scotland judgment already appears to severely limit the scope to make substantial retrospective claims for underpaid holiday, stating that a gap of three months or more between deductions will break a series.

The new two year limitation period will only make a real difference if an employee is able to show a long series of deductions, unbroken by any gaps of three months or more between underpayments. This would be very unusual, especially given that the Bear Scotland judgment strictly applies only to an employee’s first four weeks ‘EU’ holiday under Regulation 13 Working Time Regulations 1998. In most cases, the series of deductions will be broken when an employee takes the additional 1.6 weeks annual leave afforded by UK Law.

However, the new Regulations provide an additional safeguard for employers against the potential business risks posed by holiday pay litigation.