Employers’ relief – the “3-month rule” in holiday pay (and other) claims

Background

Most employers will be familiar with the holiday pay headlines over recent years and the scrutiny under which employers’ calculations for holiday pay have been.  A recent Guardian headline claimed that “UK workers are cheated out of at least £1.5bn a year in holiday pay”. The Fulton case will probably add fuel to that fire of an ongoing holiday pay saga, but it will bring welcome clarity for employers.

Cast your mind back to 2014 and significant rulings in two EAT cases; Bear Scotland and Lock v British Gas, which respectively ruled that when calculating a worker’s statutory holiday pay, employers need to include “non-guaranteed” overtime and other payments supplemental to contractual pay (such as commission). The cases also focused on the treatment and inclusion of pay for voluntary overtime and led to many employers reviewing their holiday pay arrangements; tightening up their approach to overtime to reduce liability for claims of unlawful deductions from wages.

To understand the significance of the latest ruling, it is worth recapping on the legal position and the cases of Fulton v Bear Scotland Ltd and Lock v British Gas:

• Usually, the time limit for a claim for unlawful deductions from wages is within three months of the deduction taking place (for example, the underpayment of holiday pay).
• If an employee has a claim for a ‘series of deductions’ (i.e. they  have been underpaid in relation to holiday pay for some time), the claim can be brought within three months of the last in the series of underpayments i.e. when they last received a payment (or underpayment) of holiday pay, rather than when they last took a period of holiday.
• In the case of Bear Scotland, the EAT decided that a gap of three months or more between a deduction of wages breaks the chain in a ‘series’ of deductions, thereby potentially reducing liability for claims of underpayments. The EAT stated, that “… a period of any more than three months is generally (our emphasis) to be regarded as too long a time to wait before making a claim“. However, the EAT did not apply any further detail to this point, leaving many employers wondering how readily they could rely on this when assessing their holiday pay liability.
• Following the EAT decision and subsequent remittance back to Glasgow ET, the majority of the claimants’ found their claims were out of time,  and did not, for the most part, amount to an unbroken series of deductions. Additionally, the underpayments had been interspersed with periods of at least three months, during which no deductions occurred, because the claimant did not take holiday.
• The claimants appealed to the EAT again on the specific ruling around the three-month principle, arguing that a three-month gap between deductions was not a hard and fast rule in every case and suggested it was not binding on a Tribunal.

The EAT Judgment

The EAT has confirmed that a three-month gap between holiday pay deductions breaks a series of deductions for the purpose of unlawful deduction from wages claims, which brings clarity to the point, for now.

It is interesting to note that, the EAT found that the use of the word “generally” in the original EAT judgment should not be taken out of context and used to conclude that the three-month rule is only a presumption.

It dismissed the appeal and held that the three-month rule in the original Bear Scotland Ltd decision was a binding precedent.

Comment

The decision that the “three-month rule” is binding on Tribunals is good news for employers and brings welcome clarity in the ongoing holiday pay saga. It reduces the ability for many employees to bring unlawful deduction from wages claims as it will mean that claims are time-barred if this gap exists. It is worth noting that the three-month rule could be subject to further appeal.

In any event, calculating the three-month gap may not be as straight forward as first considered. Previous case law around holiday pay (specifically, the inclusion of overtime) only affects the 20 days’ annual leave provided for by domestic legislation and not the additional 8 days’ given to employees via European legislation. It is, therefore, worth employers considering how you categorise employee’s holiday, i.e. do they take the 20 days first or last? This clarification could impact on the length of time between payments for the 20 days’ holiday affected by the overtime rulings.

Employers will be pleased to hear that the Judgment will also apply to other claims regarding unlawful deductions of earnings under Section 13 of the Employment Rights Act 1996. Additionally, the Government’s intervention to bring in a two-year long-stop on unlawful deductions from wages claims (from 1 July 2015) further reduced employees’ causes of action.

To assist employers with setting up their holiday pay arrangements, we have produced a toolkit which sets out the legal position and provides guidance to achieving compliance. To purchase a copy of our toolkit, please get in touch with Lynsey Harrison – 0121 214 3615, lynsey.harrison@anthonycollins.com.

If you want to discuss your approach to holiday pay or have any questions around this briefing, please get in touch with your usual contact or speak to Kate Watkins.

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