Despite the plethora of recent cases, there is still uncertainty over what components of an employee's pay should be taken into account for the purposes of calculating holiday pay. One key question for many employers is how far back can an employee go with his/her claim for back-dated holiday pay?

Two-year backstop from 1 July 2015

The Government set up a holiday pay taskforce to review the position. This has resulted in the Deduction from Wages (Limitation) Regulations 2014 being published. The regulations impose a two-year backstop on most unlawful deductions from wages claims, including claims for holiday pay, meaning that employees cannot go back further than two years with their claim. This backstop period will apply to claims presented on or after 1 July 2015.

In Bear Scotland, the EAT already established that the chain of unlawful deductions will be broken if more than three months has elapsed between the deductions, i.e. if more than three months have passed with no holiday being taken (or with holiday taken being paid correctly). This ruling already limits the scope for many workers to bring claims for underpaid holiday pay stretching back to previous holiday years.

There is also the suggestion (although no binding legal authority on this point) that it is for an employer to determine which type of leave (i.e. the 20 days European Working Time Directive leave entitlement or the eight additional days Working Time Regulation leave) is being taken by the worker at any particular time.

If we take these two points from Bear Scotland together, it is difficult to see how a worker will be able to extend their claim back beyond a year in any event. In most cases, a worker, depending on the pattern of their holidays, will have more than a three-month gap between holidays. Even if they took a holiday every three months, because the entitlement to the higher amount of holiday pay only applies to the 20 days European holiday, the employee needs to be able to show that he took a European holiday every three months to link unlawful deductions and that is likely to be difficult in practice. As such, the two-year backstop, while welcome as it provides certainty as to the maximum level of a claim, may not actually need to be relied upon in the majority of cases.

We have prepared a handy `at a glance guide to holiday pay' which provides a quick overview of what is (and is not) currently included in UK holiday pay.

At a glance guide to holiday pay

The overall aim of the legislation relating to working time and holidays is to ensure that a worker is not worse off as a result of taking holidays and as such, is not financially dis-incentivised from taking his annual leave. Essentially, this means workers should get the same wage each month, regardless of whether they are working or on holiday. This is easy enough for salaried workers, with a standard monthly wage. The difficulty arises where an employee's pay fluctuates and is supplemented to some extent by overtime, commission or other payments.

So, what payments should be included when calculating holiday pay? The general rule coming out of recent case law is that payments intrinsically linked to the performance of the employee's tasks should be included. Employers must ensure that a worker continues to receive `normal' pay when on holiday. Employers will therefore have to consider whether or not the employee receives the payment regularly enough for it to be thought of as a normal part of remuneration. In practice, this could be difficult to determine and each case will fall on its own facts. In the table below, we've set out a general overview of where the law stands on the types of payments that should be included in holiday pay if the worker normally receives them while at work, and what this means in practice:

Click here to view table.