Employment

Case law over recent years has clarified that, in some circumstances, you need to include payments such as overtime and commission in holiday pay calculations.

This has left many employers facing potential claims for underpayment of holiday pay.

How far back can claims stretch?

Many employers breathed a sigh of relief when legislation and case law seemed to determine that, if a worker had taken holidays, but been underpaid:

  • Claims brought on or after 1 July 2015 would be limited to deductions in the two years before the claim.
  • A gap of more than 3 months between underpayments would cut off claims before that gap. Furthermore, employers could classify the first 4 weeks of a worker’s annual holiday as EU statutory leave (in respect of which the relevant case law on calculating holiday pay applies); and later holiday as the additional 1.6 weeks’ UK statutory leave or contractual leave (in respect of which that case law doesn’t apply). This increased the chance of a 3-month gap between underpayments arising.

However, doubt has been cast on these limits.

As regards the first bullet, there are potential arguments that it is incompatible with EU law.

As regards the second, in Chief Constable of Northern Ireland Police v Agnew, the Court of Appeal in Northern Ireland recently held that neither a gap of more than 3 months between underpayments, nor an instance of ‘correct’ payment, will automatically cut off earlier claims. Instead, each case will turn on its facts. The Court also found that employers cannot deem the first 4 weeks of a worker’s annual holiday as EU statutory leave. Rather, annual leave falls into the same ‘pot’ regardless of its origin; and when a day’s holiday is taken, it cannot be categorised as being solely of one type or another.

The decision is not directly binding in Scotland, England or Wales, but is likely to give fresh impetus to any challenge to the limits here.

If the limits don’t apply, claims for underpaid holiday could stretch back to the start of your relationship with a worker, with an ultimate backstop of 1 October 1998.

Note that it is already clear that neither the two-year limit, nor the 3-month gap rule, apply if a worker’s claim relates to holidays they did not take because you would not have paid for them, as discussed in our earlier blog.

We’ve already revised our holiday pay calculations – are we ok?

If you have revised your holiday pay calculations (and assuming your calculation method is now correct), then workers would have needed to bring claims relating to historic underpayments within 3 months of the last in the ‘series of deductions’.

If you haven’t received claims within this timescale, you can probably relax.

If you’ve not revised your calculations, or are already facing holiday pay claims…

If you’ve not reviewed your holiday pay calculations, now would be a good time to do so. If you need advice on the best approach, speak to your usual Brodies contact, or Workbox subscribers can find detailed advice at Holiday Pay. Our recent blog discusses when voluntary overtime should be included in holiday pay.

If you’re already facing holiday pay claims, the Northern Irish Court of Appeal’s decision could impact on your litigation or negotiations. Again, if you need advice, please get in touch with your usual Brodies contact.

Kathleen Morrison

Practice Development Lawyer at Brodies LLP
As a Practice Development Lawyer, Kathleen is responsible for developing and maintaining Brodies Workbox, our award-winning online HR and employment law site.
Kathleen Morrison