Backdated holiday pay claims: Everything you need to know

8 May 2024 / Insight posted in Article

Heading off on holiday can be hugely restorative for workers. However, employers can worry about miscalculating workers’ holiday pay or incorrectly determining the employment status of their contractors, both of which increase the risk of backdated holiday pay claims.

Under the Working Time Regulations 1998, paid workers and employees who work five days a week are entitled to 5.6 weeks of paid holiday a year. While that is perfectly clear, the problems come when it is time to pay those who work fixed hours, term-time hours, and contractors fairly.

In recent years, these issues have led to an increase in holiday pay claims. This insight digs a little deeper, to reveal what the case law says and provide some practical tips to help employers avoid those claims.

Understanding holiday pay regulations and case laws

Holiday pay is something that workers expect you to get right. If you do not, it can increase dissatisfaction, damage your reputation, and potentially lead to a wave of backdated holiday claims. Despite the risks, this is a common issue for employers due to recent changes in the way you should calculate holiday pay.

In terms of case law, there have been several significant cases in recent years. The intention of the judgments has been to make sure employers pay their workers properly, so they are not discouraged from taking their holiday entitlement.

Under the current rules, where an employee or worker has fixed hours under the terms of their employment contract:

  • They should receive ‘normal remuneration’ for four working weeks of their holiday entitlement. That should include the usual ‘extras’ they would receive if they were at work, such as guaranteed overtime, shift premiums, commission, travel time payments, incentive bonuses, and on-call payments.
  • For their remaining legal holiday entitlement (a minimum of 1.6 weeks), they are entitled to receive their basic rate of pay.

The calculation for part-year and irregular hours workers and employees is much more complex, as we will see.

Recent Supreme Court decisions and amendments

Harpur Trust v Brazel

The Harpur Trust v Brazel case clarifies important aspects of holiday pay entitlement for part-time and term-time workers.

In this case, the claimant was a music teacher called Mrs Brazel. She had a zero-hour contract, worked during school term times, and took annual leave during the school holidays. In line with the ACAS guidance for staff with variable working hours at the time, her employer paid her holiday pay at 12.07% of her earnings. However, Mrs Brazel argued that she should receive holiday pay equal to the average of her earnings over the last 12 weeks.

The Employment Appeal Tribunal, the Court of Appeal and the Supreme Court all agreed with Mrs Brazel. The impact of this judgment, handed down in 2022, is that employers should not use the 12.07% calculation to pro-rate the holiday entitlement for employees who only work for part of the year.

Instead, part year workers must receive their full 5.6 weeks’ entitlement regardless of the weeks they actually work and holiday pay for both them and irregular hours workers must be calculated based on their ordinary remuneration over a reference period of 52 weeks (the government had changed the reference period by the time this case had been heard), working back from the first full week from when the leave was taken and discounting any weeks not worked.  This meant that, in practice, holiday pay for part-time and term-time employees can be proportionally higher than for those who work full-time.

The government therefore intervened and changed the law so that, for holiday years which commence on or after 1 April 2024, employers will have the choice of sticking to the Harpur v Brazel method or switching to using the newly allowed method of using the 12.07% method to calculate accrued annual leave entitlement and calculating holiday pay using a 52 week reference period which is fixed at the end of each leave year to give you the employer’s entitlement for each day’s leave they wish to take the next year.

Before you introduce any changes, ensure that you check your employees’ contracts. Employers with leave years running from January, February or March will not be able to implement any changes until their 2025 leave year. Employers whose contracts are silent about the leave year should note that the leave year will start from the date the worker started so you will only be able to implement the changes now for those who started on or after 1 April 2024.

Employers will also have the option for leave years starting on or after 1 April 2024 of using rolled up holiday pay, a practice of adding an amount for holiday to a worker’s salary, if they are transparent about what the employee is being paid by itemising the holiday pay figure clearly on the payslip.

Read more: Do you need to change your employment contracts for seasonal workers?

Smith v Pimlico Plumbers

It is not just the different rules for those working fixed and non-fixed hours that employers need to be aware of. As shown in the Smith v Pimlico Plumbers case, there can also be a risk of holiday pay claims arising from a worker’s employment status.

In this case, Mr Smith, a plumber for Pimlico Plumbers, was designated as self-employed and did not receive holiday pay for holidays he had taken. However, rather than a contractor, he proved he was an employee and took a backdated holiday claim to the Employment Tribunal and the Employment Appeal Tribunal.

He argued that he should be paid for his EU entitlement of four weeks’ leave all the way back to the start of his employment. The tribunal ruled that he could only claim backdated holiday pay for leave he had not taken and not leave he had taken but not been paid for. However, the Court of Appeal overruled them. It found that the EU protected the right to ‘paid annual leave,’ protecting Mr Smith’s right to take the leave and be paid for it.

The court said the only way an employer can argue that an employee has lost the right to paid leave is if they:

  • Specifically and transparently give the individual worker the opportunity to take paid annual leave;
  • Encourage the individual to take paid annual leave;
  • Inform the worker that they will lose their right to the annual leave at the end of the leave year.

Avoiding potential holiday pay claims

There are several simple steps you can take to reduce the risk of backdated holiday pay claims from workers and employees.

Remind workers of their rights

Firstly, you should inform your workers and employees of their entitlement to paid annual leave, offering them the opportunity to take that leave and informing them of what happens if they do not take it by the end of the leave year. One option open to employers is to require the worker or employee to take any unused leave by giving them double the amount of notice of the leave the employer wants them to take.

Clarify their employment status

You should check a worker’s employment status to make sure they are genuine contractors and are not entitled to paid annual leave. Being deemed an employee for IR35 purposes can give contractors the impression they can also enforce employment rights, which increases the likelihood of holiday pay claims. If you are unsure of an individual’s employment status, getting legal advice can help you avoid a claim in the future.

Avoid making miscalculations

Miscalculations are a common cause of holiday pay claims. In this case, you should consider what should count as a worker’s normal remuneration. For example, what extra payments should you include and what is an appropriate reference period?

There should also be a clear difference between an employee’s first four weeks of holiday pay, which is paid in line with normal remuneration, and the remaining 1.6 weeks of holiday pay, which is paid at the basic rate.

If you need to make changes to your holiday pay calculations, consider taking professional advice to devise an appropriate strategy. You should also ensure that any changes you make are reflected in your employment policies and contracts.

Implementing holiday pay compliance practices

Given the changes in the recent holiday pay rules and regulations, it is worth reviewing your current systems and policies to ensure they are compliant. You should:

  • Create an employee handbook that clearly explains the rules around holiday pay and the measures you have put in place to ensure all workers are paid fairly.
  • Use employment contract terms and annual leave policies that clearly state the holiday entitlement for every worker and the annual leave request process.
  • Put robust record-keeping and payroll processes in place to reduce the risk of errors and enable you to resolve any holiday pay issues quickly.
  • If you are making any changes to your holiday entitlement and pay calculation, you should speak to your workers, explain the changes, and issue them new contracts to sign. For employees, you may need to formally consult with them regarding any changes.
  • Ask employees to give you as much notice as possible for leave requests to allow for planning. As a minimum, the notice period should be twice as long as the leave an employee request.
  • Be consistent when dealing with leave requests to avoid claims for unlawful discrimination. A simple first-come, first-served method is usually fair.

Procedures for backdating holiday pay

You now know how much holiday pay you should be paying employees and how to reduce the risks of a claim, but what happens if you have underpaid employees previously? In this case, certain rules dictate what backdated holiday pay claims employees can make:

  • An employee can only bring a backdated holiday pay claim within three months of the underpayment occurring.
  • In a Supreme Court case called Chief Constable of the Police Service of Northern Ireland and another v Agnew and others, it was held that a gap of more than three months between underpayments will not break a series of unauthorised deductions from wages. Whilst some employers have opted not make backdated payments but just to pay correctly going forward, this is a risky option. Holiday pay is a notoriously complex and ever-developing area of employment law and any error in future holiday payments could revive the workers’ ability to pursue the backdated pay.
  • If there are no gaps between underpayments that exceed three months, employees can claim for underpayments over a maximum period of two years.

So how does that work in practice? Here’s an example.

It is October 2023 and you have underpaid an employee for leave they took in August, July, and April 2023. You also underpaid them for the leave they took in December and November 2022.

Considering the Supreme Court case in Agnew, you would need to pay the employee for the leave in November 2022 and December 2022 as well as the leave in August, July, and April 2023.

There is also an important exception to the two-year limit for backdated claims in cases where the reason the individual did not take their leave was because they had been miscategorised as self-employed and therefore both parties operated on the assumption that they were not entitled to it. In these cases, the leave is carried forward indefinitely from year to year until the employment terminates, whereupon the worker is entitled to be paid in lieu. Employers can reduce the risk of accruing this type of liability by encouraging workers to take any accrued leave or even giving the worker notice to take the leave of double the amount of leave to be taken.

How Moore Kingston Smith People Advisory can help

While this guide sets out the rules and regulations around holiday pay claims as they stand, the legislation in this area is constantly changing so you should keep a close on any new developments.

If you have any concerns about backdated holiday pay claims or questions about the steps you can take to reduce the risks, we can help. Find out more about Moore Kingston Smith People Advisory and contact us today to discuss your holiday pay issue in confidence.

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