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Case law: Ruling confirms how far back employers must go when compensating employees for past holiday underpayments

Employers will welcome confirmation of the 'three-month rule' limiting how far back they must go when compensating employees for underpayments of holiday pay for past commission, overtime, etc, following a further holiday pay ruling.

Legal Alert

This update was published in Legal Alert - June 2017

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Another ruling by the Employment Appeal Tribunal (EAT) confirmed how far back employers must go when calculating back pay owed to an employee as a result of past failures to include payments such as overtime or contractual results-based commission in the employee's pay for their four-week holiday entitlement under EU law. Such failures are common since, until recent rulings, it was not clear that such payments had to be included in holiday pay.

The EAT ruled:

  • For claims brought in the Employment Tribunal, a claim for failure to pay proper holiday pay for an employee's four weeks' holiday, required under EU law, is a claim for 'unlawful deduction from wages'
  • The 'three-month rule' established in an earlier decision continues to apply, so such claims must be made within 3 months of the underpayment/deduction or of the last of a series of underpayments/deductions
  • A 'series of deductions' means a chain of underpayments linked by both time and cause. If the cause of one underpayment is different from the cause of another, or they are too far apart, they are not part of the same series of underpayments
  • 'Too far apart' means anything over three months
  • Therefore, any underpayments not part of a series, and are made more than three months before the referral of the relevant claim to Acas, will be out of time and cannot be recovered (subject to the Tribunal's discretion if it was not reasonably practicable to bring the claim in time)

Therefore, even if an employee can prove they have been underpaid holiday pay in the past, they can only recover the back pay in relation to holidays they have taken since the most recent three-month gap.

The ruling reiterates that earlier rulings requiring overtime and commission to be included when calculating holiday pay only apply to the four weeks' holiday required under EU law. They do not apply to the extra 1.6 weeks' holiday added by UK law (under the UK Working Time Regulations) or any contractual holiday entitlement provided for in an employee's contract of employment.

When calculating whether there has been a three-month gap between underpayments, an employer must therefore look at the gap between the last day of one year's four-week entitlement and the first day of next year's four-week entitlement. So if:

  • a firm's holiday year runs for the calendar year, ie 1 January to 31 December, and
  • an employee took all four weeks' holiday before 30 September in one year (ie more than three months before the end of that holiday year)

by definition, the gap between the end of the four-week period in that year and the beginning of his four-week holiday period in the next calendar year will be more than three months.

The fact the employee may have taken some or all of his additional 1.6 weeks' holiday, or any contractual holiday, after 30 September, is irrelevant. Those UK and contractual holidays will not count for the purposes of calculating the three-month period between EU holidays.

A problem for some employers will be determining which specific days of holiday taken by an employee are EU holidays, and which are UK and/or contractual holiday.

Some employment contracts specifically require employees to take EU holidays before UK and/or contractual holidays. If a particular employment contract does not do so, it is still arguable that employers have this power in any event. However, specialist advice is recommended for employers who are uncertain.

Another pitfall for employers is that the three-month gap only applies in relation to claims for past underpayments brought in the Employment Tribunals, and therefore framed as unlawful deduction from wages claims. If the claim is, instead, a claim for breach of contract in the High Court or County Court, the three-month rule does not apply.

On a general note, the ruling did not address the issue of how holiday pay is calculated for individual holidays.

Operative date

  • Now

Recommendation

  • Employers should ensure they know which holidays count, given confirmation of the 'three-month' rule in a recent ruling, when calculating how much underpaid back holiday pay must be paid to employees, to avoid the risk of an unlawful deduction from wages claim

Case law: Fulton and others v Bear Scotland UKEATS/0010/16/JW

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.