Key takeaways
Tribunal can award interest on unpaid holiday pay
Recent ruling confirms authority under employment legislation.
Employers face higher costs for late payments
Interest adds financial risk to non-compliance with holiday rules.
Clear payroll processes reduce exposure to claims
Timely payments help avoid disputes and additional penalties.
Holiday pay: does a tribunal have the power to award ‘interest-like’ compensation on unpaid holiday pay?
Where an employer breaches a worker’s entitlement to annual leave (by failing to grant the worker paid leave) or fails to pay the correct amount of holiday pay, the worker can either bring a claim for unlawful deduction from wages or a claim under reg 30 Working Time Regulations 1998. If a reg 30 complaint is upheld, the employment tribunal must order the employer to pay the worker any holiday pay which it finds to be due, and can award the worker such compensation as the tribunal considers just and equitable having regard to the employer’s default and any attributable loss sustained by the worker. The Employment Appeal Tribunal (EAT) has recently considered whether this compensatory power is wide enough to allow a tribunal to award ‘interest’ on unpaid holiday pay.
In the case in front of the EAT, M provided services to a dental company for almost six years, during which time he was given no entitlement to paid annual leave. M was made bankrupt for a period of around one year during that time. After his contract was terminated, M claimed that he had been a ‘worker’ all along and that he was owed six years’ worth of unpaid holiday pay. The Employment Tribunal upheld M’s claim and held that he was owed around £83.5K in unpaid holiday pay, but rejected his claim for ‘interest’ on this unpaid holiday pay and ruled that the whole award should be paid to his trustee in bankruptcy.
The EAT partially upheld M’s appeal and held:
The Tribunal had correctly held that any compensation it awarded M was payable to his bankruptcy trustee.
Whilst tribunals do not have an express power to award interest on unpaid holiday pay, reg 30 is framed in wide terms and a tribunal is not prevented from awarding ‘interest-like’ compensation designed to compensate a worker for the financial reduction in value they have suffered from the failure to pay holiday pay. Further, when it had considered the question of interest, the EAT held the Tribunal had wrongly considered the following irrelevant factors: (a) the lack of bad faith on the company’s part; and (b) the fact M had paid tax on a self-employed basis.
When assessing how much ‘interest-like’ compensation to award to a worker for late receipt of holiday pay, tribunals can assess the worker’s loss and consider the cause(s) of it. However, the worker does not need to adduce evidence that their compensation would be worth less when paid many years later than it ought to have been, nor to provide proof that they have suffered ‘loss’ due to the late receipt. These were both obvious factors which can be assumed by tribunals.
The case will now return to the original Tribunal to reconsider the issue of interest-like compensation on the unpaid holiday pay.
The EAT’s decision on the ‘interest-like’ compensation point will have an impact on the valuation of any outstanding/historic holiday pay claims. Depending on how long the holiday pay has remained outstanding for, the added ‘interest-like’ compensation could significantly increase the value of the tribunal’s award in individual cases.
Could this principle apply to unlawful deduction from wages claims?
Due to a technicality regarding time limits, claims for underpaid holiday pay (as opposed to claims that an employer has failed to recognise the individual is a ‘worker’ entitled to paid holiday) are generally brought as an unlawful deduction from wages claim. Could this principle apply to claims brought that way?
It would appear to us that the compensatory provisions of the unlawful deduction from wages provisions are also drafted widely enough to allow a tribunal to award ‘interest-like’ compensation for late receipt, and this EAT decision is likely to have strong persuasive value if such a claim is brought.
Unlawful deduction from wages claims are currently limited to two years’ worth of deductions/underpayments but an employment tribunal has recently ruled that this limit is unlawful (Afshar & Others -v- Addison Lee Limited [2025] ET 3306435/2020 & Ors; see our summary of the decision here).
Could the compensatory power extend beyond ‘interest-like’ compensation to other forms of loss?
Possibly. For example, holiday pay is almost always pensionable pay and this opens up the prospect of a worker arguing they ought to have received increased pension contributions based on the correct amount of holiday pay they should have received, either under the terms of the pension scheme, or via auto-enrolment if they are otherwise eligible. Time will tell whether forms of damage such as this are therefore considered.
Against this backdrop, the overall risks associated with incorrectly determining that an individual does not have ‘worker’ status and is therefore not entitled to annual leave, or of not paying the correct amount of holiday pay, have now increased significantly.
