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24th May 2017

Legal Issues – Holiday pay rears its head again

Since the issue of holiday pay came to the fore what seems many moons ago, there have been a number of decisions that have left us with the relatively solid premise that holiday pay should include an element of any regularly worked overtime and commission.

However, there are some issues that remain unclear. Perhaps the most important of these is that we have not been told which ‘reference period’ to use when calculating holiday pay, i.e. whether an average should be taken of the previous 12 weeks, 12 months or somewhere in between. For that reason it will currently largely depend on individual circumstances.

One issue that was a new addition to the legal thinking in this area was in relation to whether claimants could link claims for different periods of holiday that may have been underpaid; this has been referred to as ‘a series of deductions’. In Bear Scotland v Fulton, the then President of the Employment Tribunals stated that a gap of three months or more between underpayments would ‘break’ the series, effectively preventing claimants from linking holiday periods where there had been such a gap.

This was clearly detrimental to the claimants in that case as well as to the claimants in the thousands of other claims that were raised in the wake of the holiday pay developments. Indeed, the claimants in Bear Scotland appealed against that point of law, claiming that the President’s conclusions on this point were not binding.

However, the Employment Appeal Tribunal (EAT) hearing the case dismissed the claimants’ appeal and upheld the rule in relation to three month gaps, stating that it was clearly part of the decision in the earlier hearing and therefore binding.

As mentioned above, this will make it more difficult for claimants to try to include historical underpayments when making claims, as it will be fairly common for employees to have gaps of three months between periods of holiday.

‘Enhanced’ holiday pay

Another factor to consider is that the decisions on ‘enhanced’ holiday pay relate only to employees’ entitlements under European law and not UK law. As such, holiday pay need include overtime, commission etc. only for 20 days per year (the European entitlement) and not the full 28 days allowed in our domestic legislation.

It is also open to an employer to decide which holidays count towards the European entitlement. In other words, an employer can state that only the first 20 days of holiday in each year need attract ‘enhanced’ holiday pay, with the remaining eight days being paid at basic salary only.

That too can have an important impact. If we take the example of an employer with a holiday year of January to December, it is possible for an employee to take the first 20 days of holiday by, for example, September. Any other holiday taken in that year would be under their additional UK entitlement.

They may then not take the first day of their European entitlement for the next holiday year until February in that year, which would mean there would be a gap of more than three months since they last took holiday under their European entitlement. Following the decision above, that would prevent the employee from claiming in relation to any underpayment from the previous holiday year, even where they took a period of holiday under their UK entitlement in, for example, November.

In addition to this, legislation has been passed to the effect that any claim for underpaid holiday after July 2015 is limited to the previous two years.

Taking all of this into account, what at first appeared to be decisions that would open the floodgates for employees to claim underpayments into the dim and distant past have since been significantly limited by both legislation and subsequent case law decisions.

Nevertheless, employers are encouraged to pay holiday at the correct rate as far as possible to prevent complaints and tribunal claims, which can be an administrative and financial burden regardless of how limited they are in scope.

If you have any questions on any of the issues raised in the above article please contact Seanpaul McCahill.

24th May 2017