Backdated holiday underpayment claims – what you need to know

We all know what it’s like when your employees head off on holiday; their work worries disappear as they sip cocktails in the sun and 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.

Holiday pay ruling

Pay and holiday entitlement are amongst the most important things an employer in the UK should be able to guarantee. Your employees rely on consistency.

It turns out, that when it comes to Holiday Pay, the UK hasn’t always been following the EU legislation properly. Apparently we’ve been missing out on something: overtime.

In 2014, the Employment Appeals Tribunal (EAT) ruled that non-guaranteed overtime should be included in employee holiday pay. This came after a number of court cases challenged the position that employees would only get paid for their basic working hours. The main point of the EU legislation is that workers receive their ‘normal remuneration’, including regular overtime. This is so that employees aren’t discouraged from taking their holiday entitlement.

However, this rule is only valid for the 20 days of holiday required under the EU law. The additional 8 bank/public holidays, and any additional contractual holidays can be paid at the basic rate.

Holiday pay: normal remuneration

As mentioned, overtime should be included, but there are also a number of other regular payments that need to be accounted for, including:

  • commission;
  • incentive bonuses;
  • travel time payments;
  • shift premiums.

If you’re wondering if you should be paying for voluntary overtime, this is still not completely clear yet. Although, a first instance court decision in 2016 has shown that it is highly likely that it should be included. The easiest and safest way to calculate holiday pay is by basing it on the individual’s average rate of pay from the past 12 weeks.

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 underpayments (or deductions).
  • 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, provided the series is not broken.
  • 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.

Holiday pay backdating example

An example of this would be; the date is July 2017 and an employee of yours has unfortunately been underpaid holiday pay for May, April and January 2017, December and August 2016. Under this three month ruling, your employee can claim for May, April and January 2017 and December 2016. But, not for August 2016. 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 2016 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:

  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 your Jelf Risk Management consultant or visit our Risk Management section.