A recent ruling on what should be considered 'normal remuneration' in the calculation of holiday pay, and the period of time for which claims can be made, has significant potential liability implications for UK businesses. We discuss what your business should be doing following this landmark holiday pay ruling.
In 2014 the topic of holiday pay and the inclusion of overtime was brought to the attention of employers through the Bear Scotland v Fulton case. The Employment Appeal Tribunal (EAT) decided that 'non-guaranteed' overtime which is part of an employee's 'normal remuneration' should be taken into account and included in their holiday pay. However, the EAT also limited the scope for employees to claim back pay.
The EAT ruled that a claim for a series of unlawful deductions from wages for underpayment of holiday pay normally needs to be brought within three months of the last deduction, and that potentially the claim could go as far back as two years, if there is a gap of more than three months during which there has been no underpayment of holiday pay this breaks the series. As such, claims after the three-month period would be deemed 'timed out'.
Over the subsequent years, there has been a huge amount of case law on the topic of holiday pay. The 4th of October 2023 saw the conclusion of a significant case within the Supreme Court regarding holiday pay and as a result, many UK workers may now be entitled to thousands of pounds in miscalculated holiday pay.
In Chief Constable of Northern Ireland v Agnew, a large group of police officers and civilian staff claimed that they should be reimbursed for historic holiday pay underpayments. They had been paid their basic pay while on annual leave without extra payments to reflect compulsory overtime and other benefits.
The judgment, which was made public on the 4th of October, determined that thousands of police staff in Northern Ireland would be able to reclaim up to 35 years' worth of miscalculated holiday pay, amounting to a bill of more than £40m.
Although the chief constable of the Police Service of Northern Ireland (PSNI) and the Northern Ireland Policing Board accepted that the respondents were underpaid they disputed the period that they were entitled to recover, due to there being breaks of three months which automatically severed the chain of deductions. However, the court concluded that the three-month interval between underpayments of holiday pay did not automatically sever the chain of deductions. The Supreme Court's decision means that gaps of more than three months will no longer prevent individuals from bringing claims for a series of underpaid holidays.
Whilst the ruling in Northern Ireland allowed claims to go back as far as 35 years, as it currently stands in England the period that a holiday pay claim can go back is still limited to 2 years. However, if challenged, this may potentially open the way for significant claims for underpayments over two years.
What should you be doing after this landmark holiday pay ruling
Businesses should be ensuring that a thorough review on how they calculate employees' holiday pay is undertaken, specifically checking that all aspects of normal pay are considered when calculating holiday pay. If this has not been the case, you should be looking to calculate the potential liability and determine an action plan.
How to calculate holiday pay
It is important that holiday pay is paid correctly to reduce the risk of claims. If an employee is conducting regular overtime, their holiday pay should be based on their average pay over the previous 52 weeks. If during any of the 52 weeks they received no pay at all, use an earlier week in its place for calculating holiday. Likewise, if the employee only received Statutory Sick Pay, then again you should look to use an alternative week, as they should get paid the same when they are on holiday as when they are at work.
You should only count back as far as needed to get 52 weeks of their usual pay. If necessary, you can look at the pay they got over the previous 104 weeks, but no further. For the avoidance of doubt, overtime, commission and bonuses should all be taken into account when calculating holiday pay.
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