From 1 July 2015, claims for backdated pay, including holiday pay, will be limited to a maximum of 2 years under legislation introduced last week. The Government says the legislation is intended to reduce potential costs to employers and give certainty to workers on their rights on holiday pay.

The new 2 year limit is a reaction to an Employment Appeal Tribunal decision last month that pay for certain statutory minimum annual holiday should include non-guaranteed overtime and other non-salary payments for work done (Bear Scotland Ltd -v- Fulton). That decision followed a number of cases in the European courts in which individuals sought, successfully, to establish that their ‘normal remuneration’, which might include non-salary payments such as commission, should be used to calculate statutory holiday pay.

The Bear Scotland decision opened up the prospect of claims by individuals for large amounts of backdated holiday pay from their employers as ‘unlawful deductions’. It found that such claims would generally be out of time if there was a break of more than 3 months between the underpayments but, in the absence of such breaks, claims could potentially go back some significant time. To provide certainty therefore, the Government has attempted to effectively cap such claims at 2 years.

The Government has also confirmed that workers’ rights in respect of pay for statutory holiday are purely statutory, and not contractual, with the intention that individuals cannot therefore use breach of contract law to circumvent the 2 year limit for unlawful deductions.

Some practical implications of the new legislation, and the Bear Scotland decision, will take time to work their way through the court and tribunal system. For example, how will the 2 year limit sit alongside the holiday year? How regularly does overtime have to be worked and paid for it to be included in holiday pay? What allowances and bonuses should be included in holiday pay and does it matter how frequently they are paid? How can employers mitigate some of the remaining risks?

For advice on these and related issues please contact any member of the Withers Employment Group.