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Holiday Pay – Sunshine on a Rainy Day Holiday Pay – Sunshine on a Rainy Day

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May 17

Holiday Pay – Sunshine on a Rainy Day

Written by Holiday Pay – Sunshine on a Rainy Day

So the clouds have finally parted for employers with the Employment Appeal Tribunal shedding light on how far back in time a worker is able to claim unlawful deductions from their holiday pay. On the face of it, a gap of three months or more will break the chain of deductions and prevent further backdating but is it really blue skies ahead? Here’s some guidance for your business to help you forecast for future holiday pay claims.

What do we know so far? The storm began when the Employment Tribunal decided that paid holiday entitlement must include an element for earnings based commission and overtime. Understandably, employers looked for cover to escape the potential deluge of claims for holiday pay arrears, where only basic salary for holidays had been paid in the past.

As the claims came down, the legal fees went up. The Government offered an olive branch when it legislated in 2015 to ensure that claims for backdated holiday pay would now be limited to a maximum period of two years before the claim.

The decision in Bear Scotland Ltd v Fulton may have turned the tide on backdated claims for holiday pay but don’t put your wellies away just yet! You need to be sure that the three-month gap is a safe stepping stone breaking the chain for arrears claims:

  1. Only the 20-day entitlement to paid annual leave under EU legislation must include commission and overtime. If it doesn’t it will be an unlawful deduction from wages: non – compliant holiday.
  2. The additional domestic right to a further 8 days paid annual leave, and any further contractual entitlement to paid annual leave, may be paid at basic salary rate. This will not count as an unlawful deduction: compliant holiday.
  3. Many employers require their workers to take Bank Holidays as part of their total paid annual leave entitlement to 28 days. These may be non-compliant holidays if holiday pay doesn’t include commission and overtime. This will depend on whether they form part of the 20-day EU entitlement or additional leave.
  4. The date commencement of the annual leave year is important. The order in which annual leave is deemed to be taken from that date is as follows:
    • First 20 days – must include commission and overtime and will be a non-compliant payment amounting to an unlawful deduction from wages if it doesn’t.
      Next 8 days – need not include commission and overtime and will be a compliant payment and not an unlawful deduction from wages if it doesn’t.
      Additional days – need not include commission and overtime (as above).
  5. The relevant date for the purpose of unlawful deduction of wages is the date of payment for that holiday not the date of holiday.

In summary, only the first 20 days holiday in the annual year can give rise to a claim for unlawful deduction from wages where commission or overtime is not paid. This will include Bank Holidays where workers are required to take these as part of their paid annual leave entitlement.

These examples assist in mapping the annual leave taken over the course of the year, allowing any three-month gap between unlawful deductions to be identified and therefore break the chain on any claims for arrears of holiday pay.

The employer’s leave year runs from 1 January to 31 December 2017. Bank Holidays form part of a worker’s annual leave entitlement. Staff are entitled to 28 days holiday and are paid on the last Friday of each month. Bank Holidays: 1 January, 14 and 17 April, 1 May, 29 May, 28 August, 25 and 26 December.

Worker A consistently works overtime but payment for this is never been included in her holiday pay. She takes her annual leave to fit around school holidays:

Jan 2017 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2018
1 2 2 1 2 1
BH BH BH BH BH BH
5 4 5 6
AL AL AL AL

The 20th day of non-compliant holiday is the August Bank Holiday. Payment for this is due on 26 August. The holiday taken in December need not include an element for overtime. It is compliant. The new leave year means that the January Bank Holiday must include payment for overtime; payment for this would be on 26 January 2018. There is more than a three-month gap between 26 August 2017 and 1 January 2018. This breaks the series of unlawful deductions and prevents any claim for back pay for 2017.

Worker B consistently earns monthly commission on his sales for the previous month but payment for this has never been included in his holiday pay. He takes his holidays throughout the year as long weekends:

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2018
1 2 2 1 2 1
BH BH BH BH BH BH
2 2 2 2 2 2 2 6
AL AL AL AL AL AL AL AL

The 20th day of non-compliant holiday is taken in November. Payment for this being due on Friday 24 November. The holiday taken in December need not include an element for commission. It is compliant. The new leave year means that the January Bank Holiday must include payment for commission; payment for this would be on 26 January 2018. There is a gap between unlawful deductions from 24 November 2017 to 26 January 2018. This will not break the chain of unlawful deductions and a future claim for back pay may bridge this gap.

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