Backdated holiday pay claims: Everything you need to know

4 April 2022 / Insight posted in Article

Heading off on holiday can be hugely restorative for workers, giving them the chance to relax, unwind and leave the pressures of their jobs behind. But it’s not always quite so enjoyable for employers. Businesses can worry about miscalculating employee holiday pay or incorrectly determining the employment status of their workers, both of which increase the risk of backdated holiday pay claims. 

Under the Working Time Regulations 1998, paid employees who work five days a week are entitled to 5.6 weeks of paid holiday a year. While that’s perfectly clear, the problems come when it’s 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. We’re going to dig a little deeper to reveal what the case law says and provide some practical tips to help you avoid those claims.

Understanding holiday pay regulations and case laws

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

In terms of case laws, 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’re not discouraged from taking their holiday entitlement.

Under the current rules, where an employee 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.

If an employee does not have fixed hours, such as a shift worker, and the hours they do vary from week to week, their holiday pay should be calculated based on their average pay over the previous 52 weeks.

Take a look at the government guidance on calculating holiday pay for workers without fixed hours for more information.

Recent Supreme Court decisions and amendments

Smith v Pimlico Plumbers

It’s 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.

Harpur Trust v Brazel

The Harpur Trust v Brazel case also has implications employers should be aware of. It 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, your holiday pay entitlement must be based on how long a worker has been employed for. In practice, this ruling means that holiday pay for part-time and term-time employees can be proportionally higher than for those who work full-time.

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

Avoiding potential holiday pay claims

There are several relatively 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.

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’re unsure of a worker’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 changes you must make to account for an employee’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’s worth reviewing your current systems and policies to ensure they’re 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.
  • 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 requests.
  • 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’ve 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.
  • If there is a gap of more than three months between underpayments, the employee cannot claim for underpayments before that gap.
  • 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’s 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.

In this case, under the three-month rule, your employee can claim for the underpaid leave in August, July and April 2023. However, they cannot claim for the leave in December or November 2022 because the gap between April 2023 and December 2022 is more than three months.

How Moore Kingston Smith 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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