Alan Lewis, head of employment at Linder Myers Solicitors, says new cap on backdated holiday pay claims is good news for SMEs

New employment regulations, which came into effect from 1st July, will limit the scope of backdated holiday pay claims to two years prior to the date that a claim is lodged at an employment tribunal.

The regulations follow the landmark decision in November 2014 where the Employment Appeals Tribunal ruled that businesses employing staff on a regular overtime basis had to take into account employees’ overall income when calculating holiday pay entitlement and not just pay their basic rate.

The three test cases, including employees from engineering firm Amec, industrial services business Hertel and roads maintenance company Bear Scotland, resulted in a ruling that decided that UK regulations were out of line with EU law.

Prior to the introduction of the cap, employers operating in sectors relying on employees regularly working on an overtime basis could have faced paying claims dating as far back as 1998 – a cost which the CBI calculated at the time could have run into billions of pounds.

The new regulations, under the Deductions from Wages (Limitation) Regulations 2014, are a welcome relief for SMEs and owner managed businesses in particular who potentially faced significant financial consequences otherwise. The key points for employers to consider when calculating holiday pay will depend on the working patterns involved.

Both guaranteed and non-guaranteed overtime should be considered when calculating employees’ holiday pay entitlement. Guaranteed overtime is classed as additional hours that an employee is contractually obliged to work and even if the employee is not called on to work them, the employer is liable to pay them for it.

Non-guaranteed overtime is where an employer is not obliged to offer employees additional hours, however, if offered, employees are obliged by contract to work them.

In the Bear Scotland v Fulton case, the Employment Appeal Tribunal clarified the judgment on non-guaranteed overtime in relation to holiday pay calculations stating that normal non-guaranteed overtime should be taken into account when calculating annual leave payments.

Alongside the cap limiting backdated holiday pay claims to two years, it is worth also noting that in order for an employee to bring a claim for backdated holiday pay, the underpayments should have taken place within three months of the claim being lodged with an employment tribunal.

If an employee’s claim for backdated holiday pay includes a series of underpayments, and there is a break of more than three months between the underpayments, employers will not have to pay for the earlier claims.

The Bear Scotland v Fulton case was a fair ruling from the perspective of employees, particularly given that according to the Office of National Statistics, as many as five million people regularly work overtime either on a voluntary or compulsory basis in the UK while the new employment regulations place a fair cap limiting the consequences for employers.

The holiday pay ruling only applies to the minimum four weeks’ holiday required by EU law and not to the additional 1.6 weeks provided by UK regulations or any discretionary holidays. Employers may also avoid costly retrospective claims if they can establish a gap of more than three months between successive underpayments of holiday pay.