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Backdated holiday pay: underpayment claims

Holiday pay claims: what you need to know

We all know what it’s like when your employees head off on holiday; their work worries disappear and they come back refreshed and happy!

However, that bubble can soon burst when employees take a look at their online banking app or next payslip and realise they’ve been underpaid for the time they had off. It makes for an unhappy employee, and a worried employer. How could this happen? Well, as an employer, the way you should be calculating holiday pay has changed over the years. If you haven’t changed or looked at your holiday pay policy for a few years, then now would be the time to review it. You might be paying too little or too much, so make sure you have the facts.

Of course, it should be remembered that both employees and workers are entitled to minimum holiday and holiday pay, but in this article we’ve just referred to employees.

Holiday pay cases

Pay and holiday entitlement are amongst the most important things an employer should get right. Your employees rely on consistency.

There have been a number of significant court cases over the years, disputing that employees haven’t been paid enough for holiday pay, and in particular considering whether holiday pay should take account of payments such as regular overtime and commission. In this article, we look at the caselaw in this area as it currently stands, but of course this could be challenged or the government could decide to make amendments to the law on holiday pay, now that the UK has left the EU.

The intention of the case law appears to be to ensure that workers receive their ‘normal remuneration’ for certain holiday periods (see below).

This is so that employees aren’t discouraged from taking their holiday entitlement.

This means that the following would be included for the relevant holiday periods:

  • Guaranteed overtime.
  • Non-guaranteed overtime and voluntary overtime, where this is worked over a sufficient period of time so that it is part of ‘normal’ pay.
  • Commission.
  • Incentive bonuses.
  • Travel time payments.
  • Shift premiums.

We’ll call these ‘Extra Holiday Pay’.

Holiday pay position at present

The holiday pay rules are different for where an employee has (or does not have) ‘normal working hours’ under their contract.

If the employee has ‘normal working hours’, then:

  • They are only entitled to the Extra Holiday Pay for the four working weeks’ holiday, which is required under EU law.
  • Their remaining weeks of holiday (which as a minimum would be 1.6 weeks) can be paid at their basic ‘normal working hours’ rate.

Where the employee does not have normal working hours; or their pay varies according to the amount of work done (e.g. pieceworkers) or the time of work (e.g. where pay is dependent on varying shift patterns), then their pay is averaged over the previous 52 weeks to calculate their holiday pay:

  • This average calculation takes into account all payments to them, including any Extra Holiday Pay.
  • This calculation applies to all holiday pay (i.e. it is not just limited to the four working weeks’ holiday, which is required under EU law).

It’s important you know the details around such an important issue. If you’re not sure, GOV.UK sets out the rules based on different working patterns.

Backdating holiday pay claims

Now that you know what you should be paying your employees, you might be asking yourself; what if I’ve underpaid people and will it to come back to haunt me? Before getting too worried, there are some important rules on backdating holiday pay you should know about:

  • The limitation period for bringing claims for underpaid holiday is three months. This means three months from the last underpayment where there was a series of unbroken underpayments (or deductions).
  • A series of deductions will be broken if there is a gap of three months or more between deductions. Once this happens, claims for deductions made before that gap cannot be claimed for.
  • However, in any event, employees can only backdate their claim to include all deductions up to two years (from the date the claim is made), even if the underpaid dates go beyond this.

Holiday pay backdating example

An example of this would be; the date is July 2020 and an employee of yours has unfortunately been underpaid holiday pay for May, April and January 2020, December and August 2019. Under this three month rule, your employee can claim for May, April and January 2020 and December 2019. But, not for August 2019. This is because May is two months before July and starts the three month rule. Any underpaid holiday can be claimed for, provided the gap between is not more than three months or beyond two years from the claim being made. Hence why August 2019 cannot be claimed for, as August is four months prior to December it breaks the three month rule.

Don’t panic if you think you have unknowingly miscalculated holiday pay. Any employees wishing to make a claim must do so within three months of you correcting your method of holiday pay calculation.

Managing holiday pay underpayment

It’s important to review your current systems and take these steps to manage any future issues regarding holiday pay and employees:

  1. Set out clear contracts and working hours for all employees, including any terms surrounding overtime.
  2. Make sure you have a business/employee handbook with guidelines and measures in place to ensure all employees are paid fairly.
  3. Should an issue arise, make sure your business has secure and robust accounting systems and processes in place. This will enable you to manage and solve any potential pay issues quickly and efficiently.

If you’re concerned about any of the rulings and legislation surrounding holiday pay, or have questions about retrospective holiday payments, contact a Marsh Commercial Risk Management Consultant or visit our Risk Management section.

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