For over a decade, the developing caselaw about holiday entitlement and pay has caused headaches for employers. Holiday pay is both more expensive for employers and more complex to calculate than envisaged when the Working Time Regulations were introduced, because of the need to include overtime and commission so that holiday pay reflects the worker's normal pay.
We have advised many large employers on how to assess their risk exposure arising from historic underpayment of holiday pay. This can be a substantial figure, because claims for unlawful deduction from wages can be brought in relation to a whole series of deductions, rather than requiring a separate claim for each underpayment. Two factors typically limit employers' exposure: the 2 year 'backstop' introduced in 2015 (so that claims for deduction from wages can be backdated by a maximum of 2 years) and the "3 month rule" introduced by the Employment Appeal Tribunal in 2014, which meant that a gap of 3 months or more between underpayments breaks the series of deductions.
However, the Supreme Court has now removed the second limitation. It held in a recent case that a gap of 3 months or more will not always break a series of deductions. It has also given important guidance on what is a "series": this is a question of fact in each case, but depends on factors such as the "similarities and differences [between the deductions]; their frequency, size and impact; how they came to be made and applied; what links them together, and all other relevant circumstances.” Tribunals will therefore focus on whether there is an underlying link between the deductions.
As a result, employers in England and Wales may be exposed to unlawful deductions claims reaching back up to two years. The impact will be much more acute in Northern Ireland (where this case was brought) as the 2-year backstop does not apply there - the police officer claimants will be able to bring claims backdated to 1998, when the Working Time Regulations came into force.
However, the impact will not be limited to holiday pay - it applies to any unlawful deduction, including wages, commission, shift allowances and overtime. As well as ensuring that their holiday pay practices are legally compliant, employers should review their payroll arrangements to ensure that payments to workers are accurate and in line with their contractual terms.