Holiday Pay - Guest Article by John Morgan & Tom Corcoran

After relative calm, the courts and Parliament may revisit holiday pay

Readers will remember that from approximately 2005 through to 2016, barely a month passed without substantial developments about some aspect of holiday pay. While those frequent changes have calmed somewhat more recently, various legal changes on holiday pay entitlement are back on the agenda – coming both from potential court decisions and statutory changes by the government. This has always been a complex area and one in which prudent employers will do well to ensure that they keep up to date with developments.

Three-month gap rule – pending decision

While the exact date is unknown, the Supreme Court is expected to hand down its judgment shortly in the landmark Northern Irish “unlawful deduction of wages” case of Chief Constable (NI) v Agnew. As readers will know, an unauthorised deduction of wages claim is possible where an employee claims that an employer has unlawfully deducted or underpaid wages due under their employment contract, which can apply to unpaid holiday pay.

Existing case law decisions limit holiday pay claims presented as a claim for unauthorised deduction from wages if there has been a gap of more than three months between each claimed deduction. However, there has been a divergence of the law since the 2019 Northern Irish Court of Appeal decision in Agnew, which held that a series of unlawful deductions from holiday pay would not be interrupted by gaps of more than three months. Although this case represents the position in Northern Ireland only and is not binding in England and Wales or Scotland, it may still have relevance there. The English EAT in Smith v Pimlico Plumbers Ltd (though declining to follow the case) expressed a “strong provisional view” that Agnew was correct on this point.

If the Supreme Court reverses the “three-month gap rule” for unlawful holiday pay deductions, then this could pave the way to backdated holiday pay claims (potentially capped at two years in England and Wales and Scotland but not capped in Northern Ireland), including those for misclassified workers. This could represent a significant unexpected liability for affected employers.

Further government changes planned

Separately, the Government has announced plans to reform the calculation of holiday entitlement as one of the many reforms contained in the recently released paper “Smarter Regulation to Grow the Economy” and its consultation paper on Retained EU Employment Law (closing 7 July 2023). The proposed changes include:

1. Permitting “rolled-up” holiday pay, at 12.07% of a worker’s payslip – This is where holiday pay is automatically built into a worker’s salary in every payslip and is currently not permitted under EU case law. Despite this, it is carried out informally by some UK employers.

2. Changes for part-year / irregular hours workers – The government consulted earlier this year on proposals to change the calculation of holiday entitlement for part-year and irregular hours workers. This arose after a recent Supreme Court decision (Harpur Trust v Brazel) which held that both full-time and irregular/part-year workers should be entitled to 5.6 weeks’ holiday (and pay) per year, meaning term-time workers could have a more favourable entitlement compared to full-time staff even if they work the same total number of hours across the year. This was unsatisfactory to many and under the government’s proposals, employers would be permitted to pro-rate holiday entitlement for part-year workers so that they receive leave in proportion to the total annual hours they work.

3. Combining holiday annual leave and holiday pay calculations under the Working Time Regulations 1998 – Under the Working Time Regulations, workers are entitled separately to (1) 4 weeks under regulation 13 and (2) 1.5 weeks under regulation 13A. Under the government’s proposals, these two entitlements would be merged into a single pot of statutory annual leave, while maintaining the same

amount of entitlement overall, with the same rules over pay calculation during these periods. This is for all intents and purposes simply a technical tidying up of the legislation, with little practical impact.

4. Annual leave entitlement in first year of employment – The government is also planning to change the approach to how leave is calculated in a worker’s first year of employment, with workers accruing their annual leave entitlement at the end of each pay period until the end of their first year of employment.

Action points for employers

From the above, after a period of relative calm we have re-entered relatively choppy waters with respect to holiday pay. In terms of timeframe, the government’s proposed statutory changes are not expected until later this year or next year, at the earliest.

Given the very large potential liabilities for employers, if they miscalculate the payment of holiday pay in terms of claims by employees for historic underpayment, they should ensure that they stay in touch with developments in this area. The potential relaxation on rolled-up holiday pay is likely to be appealing to many employers in providing a simplified method for calculating holiday pay due but advice should always be taken prior to implementing any changes.

 

Please do feel free to follow us on LinkedIn (John and Tom) if you would like to be kept up to date with ongoing changes in this area.

John Morgan is a Principal Associate and Tom Corcoran is an Associate in Eversheds Sutherland (International) LLP’s market-leading Labour, Employment & Immigration team.