Key takeaways
Tribunal rules two-year cap on claims unlawful
Decision removes restriction on historic holiday pay recovery.
Employers face greater exposure to backdated claims
Workers may seek unpaid holiday pay beyond previous limits.
Review payroll practices to mitigate future risk
Proactive compliance can reduce costly retrospective liabilities.
An Employment Tribunal has recently held that the two-year limit on unlawful deductions from wages claims for holiday pay claims is unlawful. The decision could have significant implications for the valuation of outstanding holiday pay claims if this finding is upheld on appeal.
The two-year limit on claims
Claims for failure to pay the correct amount of holiday pay are often brought under the unlawful deduction from wages provisions, and these claims are currently limited to a maximum of two-years’ worth of underpayments (s23 Employment Rights Act 1996).
This two-year limit on deductions/underpayments was introduced in 2014 by the then Coalition Government (The Deduction From Wages (Limitation) Regulations 2014). The 2014 regulations followed the initial wave of holiday pay case law and, after a short six-week period of consideration by a taskforce of business representative groups, the Government said it was introducing the two-year limit because it was:
"…concerned about the significant costs for employers resulting from the recent UK and European court cases.”
This was pre-Brexit, meaning the UK was then bound by the EU principle of equivalence (meaning the Government could not make it more difficult to enforce an EU-derived right than an equivalent domestic right). Therefore, the two-year limit was applied to all unlawful deduction from wages claims, not just holiday pay claims, brought on or after 1st July 2015.
Tribunal rules that the two-year limit is unlawful
The Employment Tribunal in this case were considering various claims brought by a group of drivers working for a private hire taxi and courier company. The main focus of the legal dispute relates to whether the drivers have ‘worker’ status, but the Tribunal’s decision in relation to the lawfulness of the two-year limit is likely to have far greater significance for employers.
The Tribunal held that the 2014 regulations, which introduced the two-year limit on unlawful deduction from wages claims, are ‘ultra vires’ (i.e. they went beyond the underlying legal power or authority).
The Tribunal held that the unlawful deduction from wages rules are of such fundamental importance to workers, that Parliament cannot have envisaged that their effect could be limited via secondary legislation in the way the 2014 regulations sought to do. This was especially true where the 2014 regulations were themselves designed to ensure that the amending regulations could not be challenged under the EU principle of equivalence (by extending the two-year limit beyond holiday pay claims to all unlawful deduction from wages claims).
An employment right that is derived from primary legislation (such as those found in the Employment Rights Act 1996) can only be changed by primary legislation. Secondary legislation can only limit that employment right if this is expressly permitted by primary legislation, namely an Act of Parliament. Essentially, the Tribunal in this case has concluded that the 2014 regulations, are unlawful, because they went beyond the underlying legal power or authority afforded to the Secretary of State.
What are the potential implications?
Although this is a non-binding Employment Tribunal decision, it should not be lightly dismissed. The decision is highly likely to be appealed and, if an appellate-level decision upholds the finding of ultra vires, this will potentially have huge implications for the many thousands of holiday pay claims and disputes that remain unresolved. Even if this case settles, the Tribunal’s finding will no doubt encourage other claimants to argue that the two-year limit on their claims is unlawful. It is therefore surely only a matter of time before the appeal courts are asked to consider the lawfulness of the 2014 regulations and two-year limit.
Coupled with the Supreme Court’s decision in Agnew, which has made it much easier to establish a chain of common deductions and means gaps of three months or more are likely to be disregarded (see our summary here), the risks posed by historic holiday pay underpayments has shifted significantly.
If the two-year limit is unlawful, it is not entirely clear how far back a claim for underpaid holiday could go. The explanatory memorandum to the 2014 regulations notes, “it is possible that claims could run back as far as 1998 when the Working Time Regulations came into force”. It could also mean exposure to other claims for any other unlawful deductions (e.g. failure to pay national minimum wage, contractual sick pay etc).
Changes were made to the annual leave regime in January 2024 and the law is now much more explicit about what must be included in holiday pay calculations. For standard workers, for their first four weeks’ annual leave, holiday pay must include:
Payments, including commission payments and performance-related bonuses, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract;
Payments for professional or personal status relating to length of service, seniority or professional qualifications; and
Other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.
Over the last year, we have assisted numerous business to audit their compliance with annual leave rules producing a RAG report, and have found that many employers are not yet fully compliant with these new rules. Not including performance-related bonuses, overtime or commission in annual leave are particular high-risk areas. Some employers have been adopting a ‘wait and see’ approach on the basis that their likely liability for backpay is two-years maximum, but this is now a far less stable assumption.
Afshar & Others -v- Addison Lee Limited [2025] ET 3306435/2020 & Ors
