The 1st July rule change to holiday pay claims

By Louise Allen, Employment and Dispute Resolution Team, DWFM Beckman


The recent case of Bear Scotland Ltd v Fulton has been responsible for two important developments in the law relating to holiday pay.

In that case, the Employment Appeal Tribunal (EAT) considered how overtime (and certain travel-related allowances) should be treated for the calculation of statutory holiday pay provided for by the Working Time Directive. Essentially, the EAT decided that:

  1. payments for overtime which a worker is required to work but which an employer is not required to offer (non-guaranteed overtime) is “normal remuneration”. Non-guaranteed overtime should therefore be taken into account when calculating holiday pay for the purposes of the minimum 4 weeks’ statutory annual leave covered by the Working Time Directive; and
  2. the extent to which workers can make retrospective claims for underpaid holiday should be significantly limited. Workers cannot use each shortfall in holiday pay as part of a series of deductions (for the purposes of unlawful deductions claims) where a period of more than 3 months has elapsed between the deductions.

The Deduction from Wages (Limitation) Regulations 2014 subsequently came into force on 8 January 2015. The Regulations are designed to limit the impact on businesses of the decision in Bear Scotland Ltd v Fulton by imposing a 2 year backstop period on most unlawful deductions from wages claims (including claims for holiday pay) presented on or after 1 July 2015. In accordance with Bear Scotland Ltd v Fulton, this 2 year period will only apply where there has been an unbroken series of deductions, bearing in mind the 3 month time limit.

The inclusion of non-guaranteed overtime in the definition of “normal remuneration” is a victory for workers as it means increased rates of holiday pay. However, for employers it is likely to mean increased payroll costs as a result of having to include additional components when calculating holiday pay. Going forward, employers will need to review their staff’s working arrangements to assess whether they have workers who regularly work non-guaranteed overtime or are paid allowances which are more than simply expenses.

Conversely, the change brought about by the Deduction from Wages (Limitation) Regulations 2014 will be a welcome development for employers as it limits the ability of workers to bring substantial backdated claims for underpaid holiday (although it does not completely rule them out) by bringing breach of contract claims in the civil courts. This should have the effect of increasing costs savings for employers. Prior to this, employers were faced with the possibility of back pay claims for underpaid holiday pay stretching back many years due to the decision in HMRC v Stringer.

Read the full article in HRM Guide here and in The HR Director here.