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Regulations on holiday pay arrears come into effect

2nd July 2015

Regulations to prevent backdated claims for holiday pay going back more than 2 years have taken effect from 1 July 2015.

The Employment Appeal Tribunal ruled in November 2014 that employers must factor in overtime, commissions and bonuses when making holiday pay calculations, instead of only taking basic pay into account.

Employees are legally entitled to launch a claim against their employer within 3 months of the deduction if an employee thinks that their overtime has not been included in their holiday pay.

Backdated claims can be made for a series of deductions as long as the gaps between deductions are not longer than 3 months.

Following the EAT's ruling, the government tabled regulations that prevent employees from claiming deductions going back longer than 2 years.

Holiday pay for workers who receive irregular remuneration calculated based on their total earnings in the previous 12 weeks before their holiday.

The ruling applies to both guaranteed and non-guaranteed overtime:

  • guaranteed overtime requires the employer to offer overtime and the employee to work it
  • non-guaranteed overtime does not mean the employer has to offer overtime but requires the employee to work it if offered.

The changes cover the 4 weeks of annual leave mandated by the EU Working Time Directive and not the full 5.6 weeks statutory leave stipulated by British law.

Dr Adam Marshall, executive director of policy and external affairs at the British Chambers of Commerce, said the ruling will create "significant uncertainty" for businesses:

"Firms want further clarity from government on the new rules, and reassurance that the new requirement will be implemented in a fair and proportionate manner.

"We are concerned by the growing number of rulings that are steadily expanding the definition of holiday pay. These changes create huge risks for businesses, and could deter some from expanding and creating jobs."

Alan Lewis, head of employment at Linder Myers Solicitors, welcomed the government's decision to introduce a cap on backdated holiday pay claims:

"The new cap is good news for employers, particularly SMEs and owner managed businesses who previously could have faced significant financial consequences with claims potentially dating as far back as 1998.

"The 2 year limit will be welcomed by employers operating in sectors where workers are required to regularly work on an overtime or commissions basis."

Contact us to discuss how the holiday pay changes will affect your business.