Is holiday pay about to become even more costly for employers?

The law governing holiday pay has been an evolving minefield over the last few years. As a continuously changing concept and a benefit that is of particular importance to all workers, the issue is invariably in focus.

What is the entitlement?

All full-time employees and workers are entitled to a minimum of 5.6 weeks’ holiday each year, or 28 days, inclusive of UK public holidays. Four of those weeks are derived from European law following the implementation of the Working Time Directive into the Working Time Regulations 1998 (regulation 13(2)(c)). Part-time workers are entitled to the pro rata equivalent, although this is the minimum entitlement and so employers can agree an enhanced entitlement with their employees through their contractual terms.

Holiday, otherwise known as annual leave, is available from the outset of an employment. However, during the first year of employment, this can be restricted to a pro rata accrual against the time worked. For those on long term sickness absence or family related leave, it continues to accrue and generally rolls over into the next holiday year, to be taken at a later date. However, as a general rule there is no entitlement for untaken leave to be rolled over into the following year. Upon termination, any accrued but outstanding annual leave is payable to the exiting employee.

How much should be paid?

The rate at which holiday is payable is a “week’s pay” for each week of annual leave, as defined by sections 221 to 224 of the Employment Rights Act 1996. For those workers that work normal working hours, they are entitled to be paid their basic pay. The position was historically assumed to be the same for those working varying hours, but the position has changed considerably over last few years.

The concept of normal remuneration has been developed in relation to commission and bonus payments as well.

In a series of cases, including Williams & others v British Airways Plc [2011] IRLR 948 and more recently in Lock v British Gas Trading Ltd and others [2014] IRLR 648, it was held that the calculation of normal remuneration should include contractual commission, so as not to leave the employee worse off for having taken annual leave.

In Bear Scotland Ltd and others v Fulton and others [2015] IRLR 15, the Employment Appeal Tribunal held that for those who work varying hours, with overtime, a calculation of the previous 12 weeks worked was necessary in order to calculate the average hours worked and therefore the pay due for every period of holiday. Although less clear, regularly worked, voluntary overtime should be included when calculating a week’s pay.

The entitled can therefore be simplified to include the average earnings over the 12-week period before the period of annual leave being taken. This is known as the reference period. The reference period will change to 52 weeks in April next year, but the issue otherwise seems settled.

In response to the opening of the floodgates following the courts’ decisions, the government legislated to intervene in order to limit the exposure to businesses. They put in place a limitation on the ability to recover historic underpayments of annual leave by implementing a cut-off of two years for any backdated claims for a series of deductions to holiday pay (Deduction of Wages (Limitation) Regulations 2014).

This would come as a relief to employers who anticipated facing significant pay-outs for years of underpayments.

What are the limitations?

Importantly, Langstaff J sitting in the EAT in Bear Scotland went further and concluded that not only could a claim only continue where that claim was presented within three months, less one day of the date of the deduction, in respect of a series of deductions, any gap of three months or more would break the series.

The effect of this was that holiday pay claims were much more limited in scope than could have potentially been the case. Although there is no definition of the word “series” in the legislation, the EAT accepted the submission that it had to be a series in time so that they created sufficient frequency of repetition and were linked factually; that is, they were the same or similar types of deductions. Again, the impact of this further limitation was to create greater certainty for both employers and workers seeking to litigate.

However, this may not be the end of the story.

In Northern Ireland (NI) in June 2019, the Court of Appeal adopted an alternative view. The facts of the Chief Constable of the Police Service of Northern Ireland and others v Agnew 2019 [2019] NICA 32 are set out here. The court concluded that a series would not necessarily be broken by a gap of more than three months, or a lawful payment during the series. The focus on the word “series” as being part of a related sequence essentially means that where the series relates to the same type of payment (holiday pay), it will form part of the series even if it spreads over an extended period of time.

The NI Court of Appeal is not binding on English courts, but it could be a persuasive decision from a higher authority than the EAT for challenging future holiday pay claims and entitlements.

What does this mean for employers?

In NI, there is now no limitation imposed by the requirement to link a series of deductions by three-month periods or fewer. There is also no jurisdiction for the Deduction of Wages (Limitation) Regulations 2014 to govern NI and so employers are now exposed to holiday pay claims spanning years, even decades back to the initial implementation of the Working Time Directive in NI more than 20 years ago.

Until a successful appeal to a higher authority replicating the position in NI, the situation for employers in Great Britain is less onerous and costly. The two-year cut off and the three-month gap limitation means that holiday pay claims are likely to be less damaging for employers, albeit still worthy of proper scrutiny of their own internal practices. However, given the trend in recent years expanding the rights to holiday pay and the composition of that pay, it would be no surprise to see the extension to the scope of how workers can recover their historic underpayments in future.

Joe Nicholls is head of the employment law team at London solicitors Hodge Jones & Allen

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