Holiday pay and unlawful deduction from wages claims: tribunal says two year backstop 'not lawful'

An employment tribunal has concluded in Afshah and others v Addison Lee that regulations introduced by the government in 2015, which prevent claimants being able to go back further than two years to recover underpayments, are ‘unlawful’.

The law

Workers can bring claims for underpaid holiday in two ways: under regulation 30 of the Working Time Regulations 1998 or as a series of deductions under section 23 of the Employment Rights Act 1996. 

In both cases, the worker has a short three-month window to bring a claim, although the 'trigger point' is different. To bring an unlawful deduction from wages claim, the trigger is the date of the last underpayment. And provided a worker lodges their claim on time, they can include previous deductions as part of a series of underpayments. 

That principle was applied without controversy until 2014 when the EAT handed down its decision in Wood and others v Hertel and Fulton and Bear Scotland Limited which considered whether voluntary overtime and some allowances should be included in holiday pay. 

The judge took the opportunity to review section 23 (which doesn't define 'series' or explain when a series comes to an end) and laid down principles which severely restricted how far back workers could link underpayments of holiday pay. The Judge drew a distinction between the first 20 days leave (Directive leave) which had to include overtime etc and the remaining eight days (additional WTR leave) which didn't and ruled that gaps between the different 'types' of leave, or gaps more than three months between deductions, broke the link. 

Then, in England, Wales and Scotland, the government introduced legislation which meant workers could only recover underpayments for a maximum of two years. These regulations also inserted wording into the WTR which prevented workers from bringing holiday pay claims as contractual claims in the county or high courts to get around the two-year restriction. 

A couple of years ago the Supreme Court in Chief Constable of the Police Service of NI and others v Agnew overruled the Bear Scotland decision. It concluded that there is no need for workers to demonstrate that underpayments form a continuous sequence, or that all underpayments have to be made within three months of each other. But it did not have to consider whether the two-year backstop was lawful because the case examined the law in Northern Ireland which didn't have the same restrictions. 

Background to the case

Several test claimants brought a claim against Addison Lee to recover underpaid holiday pay as well as other claims. The tribunal accepted they were workers within the meaning of the Employment Rights Act 1996 and went on to consider whether they were able to recover holiday pay for periods when they were considered to be self-employed and for alleged underpayments made after the company started to pay holiday pay.

The claimants argued that the two year limit which restricted their ability to bring unlawful deduction from wages claims going further back than this was:

• not compatible with the Charter of Fundamental Rights of the European Union relevant to the UK; and
• ultra vires because it went beyond the powers set out in European Communities Act 1972.

Decision

The tribunal said that the UK government had exceeded its powers by introducing legislation to minimise the impact of the Bear Scotland decision via regulations. It said that it could only make this sort of change via primary legislation. This meant that claimants could try and recover holiday pay going back many years.

The judge accepted that his interpretation ‘may be wrong’ and could be challenged.

Implications for other employers

This decision is not binding on any other tribunal or court. However, the decision of the judge reflects the view of some specialist holiday pay experts who believe that the government was on dodgy ground when it imposed the two-year back stop via regulations.

We'll need a binding decision before we know who is right. But it is certainly one to watch, not least because the WTRs were introduced in 1998 and it's possible that long-standing workers who have been consistently underpaid their holiday (for example by not having overtime payments included) could bring claims going back many years. 

Changes made to the WTR in January 2024 expressly state that if an employer fails to give their workers paid leave, or to pay it correctly, workers can carry forward their rights into subsequent leave years and their rights are only extinguished once this has been corrected. 

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