Employers stand to save millions of pounds following a change of legislation to wage arrears claims – which limits how far back employees can recover ‘unlawful deductions of wages’ – that came into effect on July 1st. Article by Barry Warne partner and head of employment law at hlw Keeble Hawson.

Employees’ claims stretching back years were previously estimated to cost employers up to £1.2 billion, but following the changes the figures are forecast to be dramatically reduced to between £250m – £450m.

The legislation, which prevents Employment Tribunals from taking into account wage deductions made more than two years before a claim was made, only apply to cases brought to tribunal on or after 1st July.  Existing proceedings are unaffected.

Employers do need to be aware that although the regulations apply to a number of unlawful deductions from wages, including holiday pay, bonuses and commission, they do not affect payments such as Statutory Sick Pay, Statutory Maternity, Adoption, Paternity and Shared Parental Pay.

Whilst undeniably beneficial to employers, this change in no way removes any of the employee’s rights to protection if they make a claim within the two year limit. With the inclusion of the overtime and commission within the holiday pay calculation, employees are arguably in a better position than they were before.

The new rules were introduced following a finding by the Employment Appeal Tribunal that payment for non-guaranteed overtime – i.e. overtime a worker is required to do on an ad-hoc basis – should be included in the calculation of an employee’s holiday pay. This had followed an earlier verdict from the Court of Justice of the European Union that sales commission should also be reflected in the calculation of holiday pay. These cases led the government to take action to limit ‘historic’ claims.

What the legislation provides is a long stop date which gives certainty to employers, but there remains some uncertainty about whether holiday pay claims must be brought within 3 months of when the holiday was taken.