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Holiday pay claims: new regulation offers hope for employers but not until July 2015

The Department for Business, Innovation and Skills (BIS) has implemented the Deduction from Wages (Limitation) Regulations 2014 following assessment of the possible impact of the Employment Appeals Tribunal's landmark Bear Scotland ruling on the inclusion of overtime in holiday pay calculations.


The announcement on 18 December follows the conclusions of a BIS taskforce, set up last month as a result of the potential serious financial consequences for UK businesses of the EAT's ruling on holiday pay calculations

HR magazine's HR Legal Service explains the implications of the new regulations:

What do the new regulations do?

Two year limitation

BIS recognised that, although the ruling in Bear Scotland had gone some way to limiting the scope for backdated holiday pay claims, there remained some scope for some claims for underpayments of holiday pay to go back as far as 1998. This could have disastrous financial consequences for any businesses whose employees had regularly worked overtime which was not reflected in their holiday pay over the years. The Regulations have therefore imposed a two year limit which means that claims for unlawful deductions from wages can only relate to deductions made in the two years before the claim is lodged.

However, the two year limit will only take effect from 1 July 2015 leaving employees with a window to bring claims before that date where the two year limit will not apply and therefore the potential financial exposure for their employers could be much higher. It is important to remember that the normal rules on a series of deductions will continue to apply therefore backdated claims can only be brought for underpayments forming a series which is not broken by a gap of more than three months between each underpayment, this, combined with the part of the Bear Scotland ruling which makes it clear that the ruling only applies to the 20 days annual leave entitlement under the Working Time Directive, will mean that the practical risk for most employers will be relatively low in reality.

Right to paid holiday not contractual

The Regulations also make it clear that the right to paid holiday is a statutory right and not a contractual right incorporated as a term in employment contracts. This technical point means that employees will be prevented from getting around the new two year limit by bringing contractual claims in the civil courts (where the limitation period would be six years).

What next?

The state of the law on holiday pay is still extremely uncertain. The principles established in Bear Scotland are still open to challenge and there are other variable pay elements (most notably commission) which are expected to be the subject of more landmark litigation in 2015. Employers should take heart from the new regulations and the intentions behind them but beware that the regulations themselves could be challenged in the European Courts and therefore the situation could change yet again. HR Legal Service recommends that all employers review their methods of calculating holiday pay to ensure compliance or be aware of the risks of non-compliance.

HR Legal Service is HR magazine's employment law advisory service, designed to help busy HR professionals to be at the centre of real commercial influence. The service is provided by ESP, an employment law and HR consultancy specialist