Holiday pay – Do we or don’t we mention the word contract?

Thursday 15 January 2015

On 8 January 2015 the Deduction from Wages (Limitation) Regulations 2014 (New Regulations) came into force amending the Employment Rights Act 1996 (ERA) and Working Time Regulations 1998 (WTR). For a rundown on the position of holiday pay so far, please see our previous blog as we won’t rehearse the basic principles here.

The New Regulations confirm two things:

1. Applying to unlawful deduction from wages claims made on or after 01 July 2015, a limit of two years will be put in place so that employees can only claim unpaid holiday pay for the two years immediately preceding the date of submission of the claim; and
2. The fact that an employee has a statutory right to holiday pay does not mean that he or she has a contractual right to it. Thus an employer paying its employees increased holiday pay does not therefore vary the employee’s terms and conditions of employment. This confirmation is intended to remove the possibility of employees circumventing the cap by bringing claims for breach of contract, utilising the 6 year limitation date provided by the Limitation Act 1980.

What this means?

Clearly from 01 July 2015 potential claimants will be stuck with a two year cap. There may be an influx of unlawful deduction from wages claims in the interim however this is doubtful given the Judgment of Bear Scotland and the three month series of deduction cap that has already been put in place. If holiday pay claims weren’t dead after the Judgment, they surely will be in July.

More importantly, the New Regulations give guidance on the contractual position for employers. The situation could still be confusing to some, depending on the contractual provisions that they had in place before the Judgment or that they have put in place in the interim. Best practice is as follows:

• If an employer has contractual provisions in place, pre-dating the Judgment and the New Regulations, paying enhanced holiday pay rather than basic rate – they should continue to pay at that rate (providing the rate is in accordance with Bear Scotland).

N.B. if they stop paying the enhanced rate, an employee might succeed in a breach of contract claim as the contractual provision was in place before the New Regulations;

• If an employer has contractual provisions in place, predating the New Regulations but paying enhanced holiday pay in accordance with Bear Scotland – they should continue to pay at that rate.

N.B. if they stop paying the enhanced rate, an employee might succeed in a breach of contract claim as the contractual provision was in place before the New Regulations;

• If an employer has, as a result of the Judgment, started paying enhanced pay rather than basic rate, without clarifying the contractual position, they pay it as a statutory payment and the contract is not varied as a result of the New Regulations;

• If an employer has, as a result of the Judgment, started paying enhanced pay rather than basic rate and at the same time clarified that the enhanced payment does not represent a contractual variation, they have received good advice as it can’t hurt to make the position clear; and

• Going forward, employers should pay enhanced holiday pay in accordance with Bear Scotland. They don’t need to change the contract, but if they wish to clarify the position to their employees, they can state that contractually, basic pay will be paid in respect of holidays and that according to the New Regulations employees are entitled to a statutory uplift in respect of non-voluntary overtime and/or commission, that will not represent a variation of their contracts of employment.