Handling historic holiday pay claims

The risk of large backdated claims for statutory holiday pay has been with us for some years. We explain some recent developments which could help employers assess their risk more accurately.

Overview of the risk areas

Historically, the risk of backdated claims for holiday pay under the Working Time Regulations has come from three main areas:

  • Miscategorising workers as self-employed: as the recent decision of the Supreme Court in Uber v Aslam demonstrates, if individuals are treated as self-employed but subsequently establish worker status, their employers will face significant claims for unpaid holiday pay.
  • Underpaying holiday pay: a number of decisions from the European Court of Justice have shown that some provisions of the Working Time Regulations on calculating holiday pay are out of step with the Working Time Directive which they were designed to implement. The most recent disputes have been about the way voluntary overtime has been treated. The decision of the Court of Appeal in the Flowers litigation confirms that voluntary overtime should be included in the calculation of holiday pay so long as the payments are sufficiently regular and paid over a sufficient period.
  • Carrying forward untaken holiday: the Working Time Regulations set out a “use it or lose it” regime. However ECJ case law has established a limited right to carry forward in the event of long-term sickness and during periods of statutory leave. Recent amendments to the WTR also permit carry forward for up to two years where it is not “reasonably practicable” to take it in the relevant leave year “as a result of the effects of coronavirus (including on the worker, the employer or the wider economy or society)”.

These rules apply to the core four week paid holiday entitlement guaranteed by the Working Time Directive, and not to the additional 1.6 weeks entitlement under the Working Time Regulations, or any additional contractual holiday.

A reminder of the time limits

There are two possible ways of enforcing entitlement to holiday pay: a claim for breach of the Working Time Regulations, or a claim for unlawful deduction from wages under the Employment Rights Act.  Both types of claim are subject to a basic three month time limit.  However, under the ERA, where there is a “series of deductions” it is possible to bring a claim within three months of the final deduction in the series.

There are two recently introduced qualifications about the rules on a series of deductions:

  • The two year backstop: under regulations introduced for claims lodged after July 2015, claims under the ERA can only go back for a maximum of two years from the date of the claim.
  • The three month gap rule: in the Bear Scotland case, the Employment Appeal Tribunal ruled that it was not possible to link deductions into a series if there was a gap of more than three months between each deduction. 

Recent and anticipated case law

Claims on termination

As well as giving rights to employees to enforce their rights while they are still in employment, the Working Time Regulations also allow a claim for accrued but untaken leave on termination. Normally this will only be for the current leave year, though as noted above there are some exceptions. In addition, where a worker has been denied the opportunity to take leave entirely because they have been miscategorised as self-employed, the ECJ’s ruling in Sash Windows allows a worker to claim for untaken leave during the whole period of the engagement. A recent ruling from the EAT in Smith v Pimlico Plumbers has said that this principle does not extend to cases where holiday has been taken, but not paid for by the employer. However, this decision is under appeal to the Court of Appeal.

The three month rule

The Northern Ireland Court of Appeal has disagreed with the EAT’s ruling in Bear Scotland that a gap of more than three months will break a series of deductions. This decision is not currently binding on tribunals in Great Britain, but will be if it is confirmed by the Supreme Court when it hears the employer’s appeal later this year.

Voluntary overtime

The employers in Flowers have appealed to the Supreme Court about the issue of whether they were obliged to include voluntary overtime in the calculation of holiday pay. However in view of the national agreement (described below) this appeal is now unlikely to go ahead. That will still leave us with some uncertainty about when voluntary overtime becomes sufficiently regular to warrant inclusion.

Could the NHS provide a model for settling historic claims?

NHS employers in England have reached a framework agreement with the unions about a long-standing dispute about the calculation of holiday pay for employees on the standard NHS terms and conditions (known as “agenda for change”).

The detailed terms of the agreement are outside the terms of the note. However in outline, as well as adjusting the calculation of holiday pay for the current financial year onwards, corrective payments will be made for the two preceding financial years. To be eligible, employees must have received overtime payments in a minimum of four months during the relevant year, which were not included in their holiday pay calculation at the time. They will then be entitled to a one-off payment (which will not be pensionable) equivalent to 16% of those overtime payments.

While every employment situation is different, a similar approach could be adopted in other sectors, many of which are already facing multiple claims for underpaid holiday pay.

Our content explained

Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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