Time to clarify rules on holiday pay

Holiday pay claims could have problems for businesses with cash flow issues. Picture: Contributed

This decision brings a number of significant challenges for businesses, including dealing with the cashflow implications of any claims, deciding how to calculate holiday pay, and considering whether to restructure working arrangements to manage potential future liabilities.

An area that has received less attention is the impact of unpaid holiday pay claims on an insolvent business.

The rate of business failures has fallen as the economy has improved. Nevertheless, insolvency practices appointed to companies with employees or former employees will need to consider carefully how to deal with claims for underpayment of holiday pay bopth before and during an insolvency process.

In effect, in an insolvency, unpaid holiday pay is paid in priority to unsecured creditors and some secured creditors. That could lead to one potent issue – that those other creditors may have to wait longer for a share of a smaller pot of cash.

The limited backdating of these claims will reduce the impact on other creditors. Claims must be brought within three months, and if there is more than a three month gap between periods of underpaid holiday, the worker will only be able to claim for the most recent underpayment. That shouldn’t diminish the implications of the decision, though, and larger insolvencies could still carry significant liabilities.

For companies which continue to trade during an insolvency process, remaining employees will need to be paid at the appropriate rate for holidays. There are clear challenges here for insolvency experts, including the issue of what amounts to “normal remuneration” in the business and therefore what needs to be included in holiday pay calculations.

The biggest challenge is the lack of clarity as to how payments should be calculated. Given the high stakes, the judgment is likely to be taken to the Court of Appeal and beyond, meaning the full implications of this dispute may not yet be known until well into 2015.

• Fiona McKerrell is a corporate restructuring partner at law firm HBJ Gateley