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Advice

Calculating holiday pay correctly

We are now in the depths of summer and numerous employees are no doubt enjoying their annual leave entitlement to escape the typical British weather. But whilst their holidays are hopefully trouble-free, calculating holiday pay can be a tricky business. What happens when employers don’t get it right?

Background

As most employers are no doubt already aware, holiday pay cannot be calculated based on basic salary alone; it must be based on “normal remuneration”. Employers should therefore consider commission, overtime pay, and other allowances when calculating how much holiday pay is owed to their employees.

Employers should be wary that workers in the UK can claim for unpaid holiday pay, as long as they bring the claim within three months of the last in a “series of deductions” (which in most cases will be the monthly payroll date). This means that in theory, underpayments of holiday pay going back several years could be recovered in a single claim.

However, much to the relief of employers, employment tribunals have restricted the ability for employees to claim historical underpaid holiday in recent cases. For example, where more than three months has elapsed between deductions, this breaks the series of deductions and anything before the three-month break can no longer be claimed. In addition, for claims brought on or after 1 July 2015, employment tribunals will look back no further than two years from the date of the complaint.

The advantage this gives to an employer is that if they start paying holiday pay at the correct rates, this will effectively extinguish any historical claims once a period of three months has elapsed, as there will be no “series of deductions” on which to base a claim.

New developments

Unfortunately, the recent Court of Appeal decision in Chief Constable of Northern Ireland Police v Agnew brings that safety net for employers into doubt.
In a wide-ranging appeal, the Northern Ireland Court of Appeal (NICA) decided a number of issues including what is meant by a ‘series’ of deductions from wages relating to holiday pay, and the meaning of ‘series’ in the Employment Rights (Northern Ireland) Order 1996 (“ERO”).

The key points from the judgment are:

  • That a gap of three or more months between deductions will not break the series of deductions. An employee can therefore claim for underpaid holiday that occurred before the three-month gap and it would form part of the series of deductions.
  • It is a question of fact whether a deduction forms part of a series. For example, if all deductions arise out of the fact that holiday pay was only paid as basic pay and did not include overtime/allowances, they are likely to form part of the same series.
  • A series of deductions will not be interrupted by a lawful payment.

Implications for UK employers

Although this decision is not binding in England, Wales or Scotland, the wording in the ERO relating to a series of deductions is identical to the Employment Rights Act 1996. It is therefore likely that we will see this decision being raised by unions and employees in the UK who are involved in claims and/or are negotiating holiday pay deals.

Furthermore, the current estimate of the claims for the 3,700 Northern Irish police officers and civilian staff is a staggering £40m. Given the sum of money at stake, it is likely that this this decision will appealed to the Supreme Court. This should be a concern for employers because a decision from the Supreme Court would be binding throughout the whole of the UK.

On the other hand, there is still a two-year cap on unlawful deduction claims for any claims brought on or after 1 July 2015. This cap means that, even if NICA’s judgment was to be applied in an English appeal court, an unlawful deduction claim issued now would still have a cap on it of two years’ worth of losses.

There also remains the prescribed time limits for bringing unlawful deduction of wages claims (three months from the last in the series of deductions). Therefore, if an employee did not bring a claim within that three-month time limit they may have difficulty pursing it.


Alan Hamblett, partner in the debt collection team at Corclaim

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