Make holiday cash clear cut or be prepared to pay

A recent ruling at an Employment Appeal Tribunal has only served to further
muddy the waters of holiday pay under the existing Working Time Regulations

A recent Employment Appeal Tribunal (EAT) decision has only exacerbated the
fog of confusion surrounding the issue of holiday entitlement under the Working
Time Regulations 1998 (WTR).

The case was Canada Life Ltd v Gray and another. Mr Gray and his colleague
had been self-employed consultants for Canada Life since 1975 and 1968
respectively, until their contracts terminated on 31 October 2002. Following
their dismissal, they received two final commission payments on 20 November
2002, and 20 December 2002. On 30 January 2003, both brought claims to the
Employment Tribunal. They sought unpaid holiday pay under the WTR, despite
having never applied for holiday or to be paid in lieu of holidays during the
duration of their contracts.

The tribunal found in their favour. It held that both were entitled to four
weeks’ paid leave under the WTR, and that it was not necessary for a worker to
actually take holiday to claim payment for it. It dismissed Canada Life’s
assertion that the claims were out of time, ruling that they had been brought
within the time limit of three months from the final deduction of wages on 20
December 2002.

The EAT upheld the tribunal’s decision and ruled that Gray and his colleague
were entitled to holiday pay under the WTR, despite being self-employed
consultants, and failure to do so constituted an unlawful deduction of wages
under the Employment Rights Act 1996 (ERA). They were awarded £30,000 and
£20,000 respectively for holiday pay accrued since October 1998, when the WTR
came into force.

Interestingly, the EAT drew an important distinction between remedies
available to a worker while still employed, and those available once employment
is terminated. During employment, a worker cannot be paid for untaken holiday –
they must take any holiday within the prescribed holiday year, so as not to
lose it. But the EAT stated that upon termination of employment, a worker can
claim for holiday they have not taken, which is not limited to holiday owed
within the holiday year immediately preceding the termination.

The EAT said the claims had been made within the correct time limit. In
failing to make payments of holiday pay for the leave years prior to 30
September 2002, Canada Life had made a series of unlawful deductions. These had
continued after the termination of the men’s contracts on 31 October 2002,
because no provision had been made for the unpaid holiday pay in the commission
payments made on 20 November and 20 December. The EAT concluded that the three
months’ limitation period for bringing the claim did not start on the date of termination
(31 October 2002), but on the date of the last unlawful deduction (20 December

The practical implications of this case for employers are serious, not least
because workers whose employment is terminated can potentially claim for
holiday pay dating back to the introduction of the WTR in 1998. However, a
similar case – Commissioners of Inland Revenue v Ainsworth and others – is due
to be heard by the Court of Appeal shortly. It is hoped the judgment will
provide more guidance to employers caught up in similar circumstances. In the
meantime, employers should:

– make some regular payment in lieu of holidays if they are in any doubt as
to a worker’s holiday entitlement under WTR

– ensure consultancy agreements expressly state that the consultancy fee
includes a suitable payment for holiday pay

– maintain accurate records of holiday entitlement of all workers; and

– ensure all workers take their four weeks’ statutory minimum leave during
the holiday year.

By Sue Nickson, Partner and head of employment law, Hammonds

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