Holiday pay claims limited to two years from July 2015

Employees already have the right to claim for a series of deductions from their wages within three months of the latest deduction. In the Bear Scotland case the EAT decided that a gap of more than three months between any deductions for underpaid holiday in the series broke the chain, thereby limiting the employer’s liability. However, the EAT set no limit on how far back retrospective claims could stretch. The new regulations will limit the period for backdated claims to two years from the date of the claim.

Limitations
The two year time limit only applies to claims made after 1 July 2015, so there is significant scope for employees to bring claims before this and avoid the limitation period. Given the publicity surrounding the Bear Scotland decision, and significant trade union involvement, this is a real risk for employers. It means that the usefulness of the new regulations is quite limited, in the short term, for underpaid holiday pay claims.

The new regulations also confirm that the Working Time Regulations 1998 do not give employees a contractual right to paid leave. This provision is intended to address the concern that employees could bring breach of contract claims for underpaid holiday pay in the civil courts where there is a six year time limit for such claims.

However, this was always going to be a difficult argument for an employee to make. And the risk of breach of contract claims remains for any employers whose employment contracts incorporate the working time regulations, although these contracts are rare in practice. So the impact of this change is limited.

Challenge
The regulations do not apply to underpaid holiday pay alone. They apply to almost all claims of unauthorised deductions from wages, so the time limit cap will be helpful for employers in the longer term. But there are exceptions in the regulations: they don’t, for example, apply to the underpayment of statutory sick pay, statutory maternity pay and protective awards made by tribunals.

However, because of this there is a risk that the enforceability of the new regulations will be challenged, on the basis that the government has acted beyond its powers in applying them to most claims for unlawful deduction from wages and not just holiday pay. The right to holiday pay comes from European law and the government is entitled to make regulations to fulfil an EU obligation. However, most unlawful deductions claims are unrelated to EU law, and the right not to suffer an lawful deduction from wages is set out in primary UK legislation - the Employment Rights Act 1996. So, arguably, the new regulations have been made in excess of what the government is entitled to do under secondary legislation. If challenged, the government will have arguments to defend the new rules, but ultimately it is difficult to predict how the courts would view these arguments.

Action
While helpful, the new regulations do not significantly alter how employers should deal with the holiday pay issue. It is still important to check contracts to ensure that breach of contract claims are not possible. Employers should also assess the impact of the Bear Scotland decision on their holiday pay arrangements and calculations. If issues are identified, employers will need to decide how to manage that risk. If employers try to alter holiday pay arrangements now, this will provide a break in the chain and limit their liability for back payments. However, in some cases it may be worth not highlighting the issue until after 1 July 2015 when the two year time limit takes effect.

Nicola Briggs is a senior associate at Dentons