Two-year limit on backdated claims for holiday pay

New regulations come into force on 8 January which will limit, from 1 July 2015, how far back claims for unlawful deductions of wages can go, including claims for holiday pay. The Deduction from Wages (Limitation) Regulations 2014 (the Regulations) were made following discussions with a task force set up by the Government after the decision in the holiday pay and non-guaranteed overtime cases last November. The Government intends the Regulations to protect UK business from “the potentially damaging impact of large backdated claims”. At the same time, a new Direction to Employment Tribunals means claimants will not have to pay more than one ET fee to bring a holiday pay claim.

The Regulations prevent an Employment Tribunal (ET) considering deductions which were made more than 2 years before the unlawful deductions claim was brought. However, to ensure fairness and allow workers a sufficient transitional period, this only takes effect for claims presented to an ET on or after 1 July 2015. As part of the discussions, the Government looked at various options including limiting claims to a six-year backstop (similar to breach of contract claims) but introducing the change immediately. It was felt that this did not bring a significant reduction for businesses facing large claims. With a two-year backstop, a transitional period was needed to ensure a balanced approach for workers who would otherwise have claims potentially reduced in size with no notice of the change.

With the Regulations, the Government estimates the liability to business to be between £250m – 450m, rather than an estimated £330m – £1.2 billion if no regulations were made. Clearly there is still a great concern for employers that large numbers of claims brought before 1 July will not be subject to the two year backstop (although of course many cases will already be limited if there has been a gap of more than three months between underpayments).

Interestingly the limit in the Regulations applies to most claims of unlawful deductions from wages, not just holiday pay. “Wages” in this context includes “any fee, bonus, commission, holiday pay or other emolument referable to [a worker’s] employment whether payable under his contract or otherwise”. However some payments are not limited, such as Statutory Sick Pay, guarantee payments, protective awards and Statutory Maternity, Adoption, Paternity and Shared Parental Pay. The Regulations would limit claims for underpayments of the National Minimum Wage but the Government notes that there are other ways of enforcing this right, such as through HMRC.

The Regulations also clarify that the Working Time Regulations 1998 do not give a contractual right to paid holiday. This is important, because there has been a suggestion that if the right under the Working Time Regulations is contractual as well as statutory, a worker could make a claim for breach of contract for underpaid holiday pay, for which the limitation period is 6 years (and so get round this 2 year limitation). However, employers should check the provisions of all employment contracts to see what the contractual rights are, and whether in some way the right to holiday pay is linked to the WTR (in which case the interpretation of holiday pay under the WTR might give the employee a contractual right to have non-guaranteed overtime and commission included in holiday pay, with 6 years in which to bring a claim).

One interesting question is whether the limit could have any effect on backdated holiday pay claims where the worker has been on long term sickness absence. However, the Regulations are unlikely to apply in that scenario, because according to case law, untaken holiday will be carried over to the next holiday year. A claim for pay in respect of untaken holiday (as opposed to holiday which has been taken but was underpaid) can only be paid when employment ends. The “deduction” is therefore likely to be at the end of employment, rather than a series of deductions stretching back. (NB: A recent case has suggested that holiday may also be carried forward if a worker is unable or unwilling to take it for reasons beyond his control, not only as a result of sickness absence. In theory, if the worker was working and being paid, there should be no claim for additional holiday pay. However, no doubt there will be further developments in this area.

Finally, a Direction has also been made by the President of the Employment Tribunals which allows workers who have submitted holiday pay claims to add in subsequent underpayments of holiday pay to their existing claim. This means claimants will not have to pay an additional ET fee for alleged underpayments in the months following their original claim.

The Government states that the task force is still continuing to work through the implications of the overtime decisions, so this may not be the last word, but as there is currently no prospect of an appeal in relation to non-guaranteed overtime, employers should now consider making calculations and changes where appropriate.