Holiday back pay limitation

The Bear Scotland holiday pay decision last year confirmed that where employees are required to work overtime, that overtime pay must be factored into the remuneration received during the 4 weeks of statutory annual leave required under the Working Time Regulations and European law. Where an employee does not receive holiday pay remuneration which reflects this overtime, they are entitled to bring a claim for that unpaid amount.

One avenue to bring the claim is as an "unauthorised deduction from wages" under the Employment Rights Act 1996. The advantage of bringing a claim in this way was that as long as the employee brought a claim within three months of a deduction or the end of their employment (whichever was the later and provided in the latter case the deduction was still outstanding on termination), in theory there was no limit to how far back the employee could claim for historic back pay where regular "deductions" were made (as would be the case where holiday pay had been continuously incorrectly calculated).

This left employers with a monumental concern about holiday back pay claims where they had large workforces and/or had carried out a regular "deduction" (through incorrect calculation of holiday pay) dating back many years. While the Bear Scotland decision sought to limit these back pay claims, it is questionable how effective it was in doing that and the Government therefore brought in new statutory changes which are effective from 1 July.

What it means

The new rule changes mean that unauthorised deductions claims can only go back a maximum of two years. While the change is primarily aimed at stopping an avalanche of holiday back pay claims, it is wider than that in scope and applies to any claim in respect of unpaid "wages".

Market perspective

Initially employers in the NHS may have felt insulated from the Bear Scotland decision for the majority of their workforce because paragraph 13.9 of AfC requires holiday pay to be calculated on the basis of actual pay received by an employee in the 3 months prior to taking holiday (and therefore is broadly equivalent to the statutory requirement).

However many NHS employers are now finding that they may be vulnerable on the basis of Bear Scotland principles to holiday back pay claims. We have advised corporates and NHS bodies on overtime, travel and other allowances, pension risk and are currently preparing for test cases affecting several employers and many thousands of employees.

In the health sector we are seeing the first trade union backed claims coming through the system and it is imperative that NHS bodies adopt a strategic view in dealing with these cases.

Udara Ranasinghe is a Partner at DAC Beachcroft. He can be contacted on 020 7894 6727 or This email address is being protected from spambots. You need JavaScript enabled to view it..