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UK decision to limit holiday back pay claims to two years provides "safety net" to employers, says expert

Out-Law News | 22 Dec 2014 | 5:25 pm | 2 min. read

Claims for back-dated holiday pay stemming from a recent employment appeal tribunal (EAT) decision will be limited to two years, the UK government has announced.

Draft regulations published on Friday (4-page / 35KB PDF) will act as a "safety net" for employers concerned about the impact of the EAT's ruling, in which it held that European law required regular payments for non-guaranteed compulsory overtime to be reflected in holiday pay calculations, said employment law expert Ed Goodwyn of Pinsent Masons, the law firm behind Out-Law.com. The regulations are due to come into effect on 1 July 2015.

"HR directors will yet again breathe a sigh of relief as the statutory wheels are set in motion to limit the risk of back pay to a maximum of two years," he said.

"Many employers have been worried that the EAT ruling regarding the back pay issue is likely to be overturned in future. The widely expressed view is that the ruling is flawed. Even if an appeal did now find that the EAT was wrong, this move by the government will at least limit an employer's exposure to two years back pay, as opposed to potentially back to 1998," he said.

The EAT ruling, which is currently being appealed, restricted back pay claims to those that applied to the last three months, unless the failure formed part of a "series of deductions" ending within that three-month period.

Holiday pay is governed by the EU's Working Time Directive (WTD), the requirements of which are expanded on and implemented into UK law by the Working Time Regulations (WTR). The WTD requires employers to give workers a minimum of four weeks paid annual leave each year, calculated with reference to the worker's "normal remuneration".

Ruling in three related cases last month, EAT president Mr Justice Langstaff said that non-guaranteed compulsory overtime should be classed as "normal remuneration". Non-guaranteed overtime means overtime that employers are not obliged to offer but that a worker has to work if offered. The judge also found that travel time payments for more than expenses incurred, which amount to additional taxable remuneration, should be reflected in holiday pay.

The draft regulations published last week would limit claims for unlawful deductions from wages under the 1996 Employment Rights Act, made on or after 1 July 2015, to two years. Claims for certain categories of payment including statutory maternity pay (SMP), statutory sick pay (SSP) and guarantee payments are not affected. The six months until July will act as a transitional period during which workers can continue to make claims under the existing arrangements.

Goodwyn said that this transitional period would give affected workers ample opportunity to make a claim before the new rules come into effect. Realistically, the deadline will not allow enough time for the three month limitation to be appealed to the EAT again or to the Court of Appeal, but is a long enough period of time for the government to resist claims that the new laws restricted the rights of EU citizens to legitimate redress, he said.

"Limiting the potential for spiralling costs which could damage UK businesses is essential, although it will have to be seen whether this new announcement will trigger a new wave of claims by employees keen to issue before the two-year rule applies," he said.

A "task force" set up in the immediate aftermath of the EAT's ruling is continuing to work through its long-term implications, the UK government said. Business bodies represented on the task force include the Confederation of British Industry (CBI), EEF, the manufacturers' organisation, the Federation of Small Businesses (FSB) and the Institute of Directors.