Employers facing claims for underpaid holiday pay -BDO

From 1stJuly 2015 back dated claims for underpaid holiday will be restricted to two years so it is expected that many individuals and unions will be trying to get claims in before the deadline to maximise period of potential back pay.

Under several rulings, including the Court of Justice for the European Union (CJEU) decision on Lock v British Gas and others, and the Employment Appeal Tribunal (EAT) decision on Bear Scotland v Fulton and others, employers must include overtime in their holiday pay calculations.

These rulings have retrospective application so employers may face settlement compensation claims or awards of back pay.

In December 2014 the Government introduced the Deduction from Wages (Limitation) Regulations 2014 which limits claims by affected employees regarding holiday pay to two years with effect from the 1st of July.

Brian Lovie, employment taxes director with BDO, explained: “We have found that many employers are unaware of this impending deadline and the potential tax and National Insurance (NI) implications it holds. Not only will employers be liable for the arrears of holiday pay which include overtime there will also be liabilities relating to tax and NI depending upon what and how it is being paid.”

“The rules, as ever, are complex and if not applied correctly could give rise to an unwelcome additional liability on the part of employers. The possible tax and NI liability will depend upon the treatment by HMRC of the claim and on whether it is back pay or compensation payment or some other independent arrangement made between the employer and employees. The Lock case also has implications for companies that pay commissions where there may be additional holiday pay outcomes not for additional hours worked but for commission earned.”

Mr Lovie added: “This is a difficult and complex ruling that could have large financial implications for the businesses involved so it is essential that they process these claims correctly and in a timely fashion to avoid penalties or problems with HMRC.”