Holiday pay - Government acts to set a back stop on back pay

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Today (18 December 2014), draft regulations were laid in Parliament which set a maximum back pay liability for any claim for underpaid holiday of two years, with the new law effective from 1 July 2015. 

The draft regulations are in response to the recent ruling by the Employment Appeal Tribunal (EAT) on holiday pay in the Bear Scotland and other joined cases (read our report of the ruling here)

The ruling established that employees are entitled to “normal pay” for holiday pay.  It applies only to the 4 week holiday entitlement derived from the Working Time Directive (“Euroleave”).  On the facts of the Bear Scotland and other cases, overtime was so regularly required of the employees that their “normal pay” included overtime pay.  The EAT ruled that the employee’s pay for Euroleave therefore needed to reflect their overtime pay as well as their basic pay.

The ruling means that variable payments must now be paid for Euroleave if they form part of normal pay.  Employees affected by the ruling can bring claims for back pay, although only to a limited extent.  The EAT ruled that, if there is a 3 month gap between past underpayments for Euroleave, claims cannot be made for underpayments before that gap. Each employee can therefore only claim underpayments up to the most recent 3 month gap.

EEF was instrumental in calling on the Government to establish a Taskforce to address the practical implications of the holiday pay ruling.  We also called for a definitive “back stop on back pay” to buttress the ruling on back pay.  We therefore welcome today’s draft regulations.

The two year back stop will apply to claims for any underpayments from wages, not just holiday pay.

The draft regulations also provide that claims for underpayment of holiday pay can only be brought in the Employment Tribunal, not the civil courts, which is intended to put to bed the speculation over whether holiday pay claims can be brought for breach of contract in the civil courts (where there is a 6 year limitation period).

We believe that there is still more work to be done to address the practical implications of the holiday pay ruling.  Going forward we will keep up the pressure on Government to ensure that the UK law implements the EU requirements for holiday pay in a way which is fair, proportionate, and not unduly burdensome on business.

For more guidance on the holiday pay ruling, and how it will affect you, book a place on one of our holiday pay breakfast briefings.

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Legal Compliance Lead

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