Why you are owed more in holiday pay

Scottish employers should ensure they are aware and advised as major issues around holiday pay loom for companies in 2014 – with many facing substantial potential liabilities in a predicted wave of tribunal claims.

This follows hard on the heels of what at first appeared to be a generous decision by John Lewis and Waitrose to pay out £40 million to staff for backdated holiday pay last year – a decision which gained hugely positive headlines for the group at the time.

The decision to correct what was described as an administration error created lots of good PR – but considering the way the law on calculation of holiday pay is developing, the decision may have been more a prescient attempt to escape any liability in relation to upcoming changes on how holiday pay has to be calculated.

Holiday pay in the UK is calculated on the basis of a week’s pay – stated to be basic salary only, at the exclusion of payments such as working allowances, expenses, overtime, commission and bonus payments. Three recent case decisions, however, indicate that in the near future this will no longer be the correct approach for employers to adopt.

In the three cases, British Airways plc v Williams and Others; Neal v Freightliner Ltd., and Lock v British Gas Trading Ltd, the courts have decided that additional payments – such as regular overtime or commission – should be taken into account in calculating holiday pay, even when these elements can make up a very significant proportion of an individual’s overall earnings or relate to contractual activities he or she clearly does not undertake whilst on holiday.

At this point it must be stressed that while we believe the change will happen in the near future, at this point in time it is not incorrect to calculate holiday pay based on basic pay only.

We expect to have a definitive statement on how to calculate holiday pay from the European Court of Justice (ECJ) – the highest court in the European legal system – sometime in 2014 and we expect it to confirm that the UK’s interpretation is wrong.

The implications for employers are going to be extremely significant. Going forward employers will have to change the way they calculate holiday pay and this is going to make an area that already causes difficulty even more complicated and costly. The less obvious issue – but the greater risk to employers in terms of cost – is their liability for backdated holiday pay. If the ECJ decision goes as we expect it to, then the reality is that employers in the UK have been incorrectly calculating holiday pay.

The result is literally millions of employees across the UK being underpaid on holiday pay, giving them claims for unlawful deductions from wages against their employers.

The further bad news for employers is that in Scotland, employees could bring a claim going back five years, and in England going back six years (the limitation periods in the two countries).

But there is also an argument that there is no limitation period for unlawful deduction from wages claims, meaning a claim could go as far back as the introduction of the Working Time Regulations in 1998 or the start of the employee’s employment, whichever is the more recent.

Factor into this multiple employees in similar positions within a company, and the potential scale of liability makes the actions of John Lewis seem much more understandable and sensible in anticipating the law’s direction of travel and taking measures to limit their ongoing and future liability.

There are a number of possibilities for employers to minimise their liability. One approach would be to negotiate with staff to agree the level of backdated holiday pay owed and then make that payment.

Alternatively employers could start calculating holiday pay now to take account of overtime, commission etc. (i.e. the method of calculation we expect to be confirmed by the ECJ).

The effect of this would be to draw a line in the sand for any potential claims as employees only have three months from the date of the last underpayment to bring an unlawful deduction from wages claim.

• Ben Doherty is head of employment at Lindsays