What's happening? 

Currently workers bringing claims for unpaid wages can recover historic shortfalls in their pay over an unlimited period, provided there is a series of deductions from their pay and their claim is filed within three months of the last shortfall in pay. Today the government announced changes to the law which will limit claims for deductions from pay filed on or after 1 July 2015 to deductions which occurred in the two year period before the claim is filed. 

Why does it matter?

The recent cases on holiday pay mean that many workers have claims for historic shortfalls in their holiday pay. The EAT ruling in Bear Scotland (read our briefing here) limited the potential extent of these historic claims in two ways. First, it held that the right to enhanced holiday pay was limited to the first 20 days' holiday in each holiday year, so shortfalls could only have arisen for these days. Second, it held that a gap of more than three months between payments for these 20 days would break the series of deductions, preventing a worker from recovering shortfalls in pay for holidays taken prior to that gap.

The EAT ruling is likely to prevent most workers recovering shortfalls in pay for previous holiday years, as there will be a gap of more than three months between the payment date for the 20th day of holiday in one year and first day of holiday in the next. However, despite this ruling many employers remain concerned because the holiday pattern of a significant minority of their staff means that they do not have a gap of over three months, and so those workers can still claim for historic shortfalls in holiday pay over many years. Other employers are rightly concerned that the EAT ruling on the effect of a three month gap is likely to be overturned in future. It is certainly hard to see the Court of Appeal upholding this approach in future litigation, and it is a widely expressed view that it is flawed. It would, for example, prevent claims arising from a series of shortfalls in six monthly payments.

Workers can work around the effect of the three month ruling by issuing a new claim every three months. However, just  last week, practice directions were published to allow new claims for unpaid holiday pay to be brought by way of an amendment to an existing claim, so avoiding fees and the early conciliation process for what is essentially the same claim.

What do employers need to do?

In the wake of the EAT ruling, many unions and employees appeared to have given up the prospect of bringing historic claims. 

The Government's announcement might well trigger a rush of claims from workers and unions keen to preserve claims for unlimited shortfalls in holiday pay beyond the two year period when otherwise few would have arisen. Employers should therefore brace themselves for tribunal claims, especially if their workers' holiday pattern means that there is no three month gap.

One consequence of this is that now is as good a time as any to consider “doing a deal”. Failure to evaluate existing holiday and working arrangements and to agree or implement changes to ensure ongoing compliance may result in collective grievances, claims and possibly industrial action. Whilst negotiating an agreement now will probably entail compromising on issues such as the inclusion of voluntary but regular overtime, it will also (if binding) ensure that there is no risk of backdated claims arising in future. Doing a deal now also allows employers to rely on the EAT’s findings on back dated pay, whilst they remain in force.

The Government's press release is here