Under the Working Time Regulations 1998 (“Regulations”), workers are entitled to be paid during statutory annual leave at a rate of a week’s pay for each week of leave. Following two recent decisions of the European Court of Justice, the Employment Appeal Tribunal (“EAT”) has held that the UK’s rules on how a week’s pay is calculated do not provide workers with the holiday pay to which they should be entitled to under the European Working Time Directive (from which the Regulations are derived). The Directive requires workers to receive during any period of leave their “normal remuneration” or pay representative of the pay the worker would expect to receive if the worker was not on leave.
UK employers have generally paid holiday pay based on a worker’s basic pay, disregarding any bonuses, commission payments or overtime unless it is compulsory for the worker to perform the overtime and is paid regardless of whether the overtime is performed.
UK employers now need to consider what regular payments they pay to their workers and whether such payments may be seen as part of the workers’ normal remuneration. Normal remuneration can include commission, overtime payments and, in certain cases, work-related travel allowances. UK employers who make such payments should consider the potential impact of these developments on their arrangements for calculating holiday pay and how any potential historic and future liabilities might be minimised.
There were concerns amongst employers that workers could make claims for unpaid holiday pay as unlawful deductions from wages going back several years and perhaps even to 1998, when the Regulations were introduced. The EAT has reduced this risk by holding that such claims will not succeed if there has been a gap of three months or more between holiday underpayments. This means if there is a three month period where a worker does not go on holiday or is not underpaid, the series of unlawful deductions is deemed to be broken.
The Government has also recently implemented a change to the legislation in relation to claims for unlawful deduction from wages in order to rule out any prospect of large back-pay claims. Claims for a series of backdated deductions from wages, including any shortfall in holiday pay, will be limited to a maximum of two years.
Workers can still make claims under the existing legislation until 1 July 2015 when the new rules come into force, although this remains subject to the worker being able to establish that there has been a series of deductions and that no more than three months has elapsed between each deduction, which may limit the potential for substantial claims.