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Holiday pay update: two-year backstop and voluntary overtime

From today, all holiday pay claims will be subject to a two-year limitation period. 

Employers will welcome this move which significantly limits potential liability in relation to backdated claims for holiday pay. Before 1 July, claims for underpaid holiday pay could theoretically have dated back to the implementation of the Working Time Regulations in 1998.

In less welcome news for employers, a recent decision of the Court of Appeal in Northern Ireland has essentially held that where voluntary overtime meets the “normal remuneration” test, it may be included in the calculation of holiday pay.

Two-year backstop

The Deduction from Wages (Limitation) Regulations 2014 implement a two-year backstop for unlawful deduction from wages claims presented on or after 1 July 2015. This means that claims for holiday pay, commission, bonuses, fees and other emoluments will not be permitted where the date of payment was more than two years before the tribunal claim is presented. 

Some commentators had expected that the months leading up to 1 July would see a flood of claims for underpayment of holiday pay being brought in order to avoid the backstop. However we have seen no significant evidence of this - most likely due to the relatively low value of most potential claims.

As we have previously reported, calculation of holiday pay has been the subject of a number of high profile cases in recent months. Below is a brief update on where we are now.

Non-guaranteed overtime

The decision in Bear Scotland in November 2014, held that "non-guaranteed overtime" (ie overtime that is not guaranteed but that the employer can require the employee to undertake) should be taken into account when calculating an employee's holiday pay. Read our article reporting on the case here.  

Commission

In the case of Lock v British Gas earlier this year, it was confirmed that commission and similar payments should be included in the calculation of holiday pay, in the same fashion as non-guaranteed overtime payments in Bear. See our briefing reporting on the case here

British Gas has recently appealed this decision to the Employment Appeal Tribunal (EAT), which is expected to hear the case later this year. We will send out a further briefing when we have a decision.

Voluntary overtime

Last week, the Northern Irish Court of Appeal held, in Patterson v Castlereagh Borough Council, that in principle there is no reason why voluntary overtime should not be included in the calculation of holiday pay where it forms part of “normal remuneration”.

The case was sent back to the Tribunal to determine whether:

  • the voluntary overtime was normally carried out by the worker; and
  • whether the voluntary overtime carried with it the appropriately permanent feature of the remuneration to trigger its inclusion in the calculation of holiday pay. 

The Court of Appeal referred to the need for the Tribunal to hear further evidence of the overtime actually carried out by the worker within a “suitable reference period”. However, further guidance on when the “normal remuneration” test will be met for voluntary overtime was unfortunately not provided by the Court.

Whilst the decision in Patterson is not binding outside Northern Ireland, it will be a highly persuasive authority. The decision is a strong indication that we are moving ever closer to voluntary overtime being included in the calculation of holiday pay where it is part of “normal remuneration”. On this basis it would be sensible for employers throughout the UK to review voluntary overtime arrangements to consider whether that test is likely to be met and/or make contingency plans in the event that employees bring a claim. The new two-year backstop rule ought to enable greater precision in the calculation of potential contingency costs and should help commercial decision making in this area.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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