Hidden within the Watford employment tribunal’s judgment in last month’s employment status case of Afshar and others v Addison Lee was an interesting – and, for employers, worrying – conclusion regarding unlawful deductions from wages.

The case itself concerned employment status: were the Claimants (who were private hire drivers) genuinely self-employed (and therefore entitled to very limited employment protections) or were they workers who were entitled to receive holiday pay and national minimum wage from the Respondent? The tribunal found that they were workers – they should have been receiving holiday pay. They had not. This finding led to a consideration of exactly what these workers could claim back in terms of previously unpaid holiday via their unlawful deduction from wages claim.

A reminder: what the law says

The right to claim unlawful deduction from wages is set out in s13 Employment Rights Act 1996. ‘Wages’ is broadly defined to include any payments connected to employment, including holiday pay. Claims must be made within three months of the last deduction, or if deductions form a series, within three months of the last in the sequence. In Agnew v Chief Constable of the Police Service of Northern Ireland, the Supreme Court ruled that deductions can still form a ‘series’ even if gaps of over three months exist, as long as they are connected in some way.

Previously, claims for unlawful deductions were unlimited. However, in 2015, concerned about large backdated holiday pay claims (following rulings that overtime and commission must be included in holiday pay calculations), the government introduced the Deduction from Wages (Limitation) Regulations 2014. These regulations added s23(4A) to the Employment Rights Act 1996, limiting claims to deductions made no more than two years prior to the claim being filed. This effectively capped backdated holiday pay claims.

What the judge in Afshar v Addision Lee said

The tribunal held that the Regulation which introduced the two year backstop on unlawful deductions claims was, itself, unlawful. The argument was a technical one. Parliament relied upon s2(2) of the European Communities Act 1972 as giving it the authority to impose a two year limit on claims by regulation. The primary objective of any regulation made under section 2(2) must be to bring into force laws which, under European treaties, the UK has agreed to make part of its law. The right to paid holiday is an EU-derived right (through the Working Time Directive). But it doesn’t say anywhere in EU law that recovery of underpayment of holiday should be limited to two years.

Also, the change introduced by the Regulations impacted not just underpayments of holiday pay but underpayments of wages more generally (including failure to pay national minimum wage). In each case, liability was limited to two years. The Regulations were, therefore, in the view of the tribunal in Afshar at least, unlawful. It held that the Regulations were invalid and that the tribunal was not bound by them.

The tribunal judge (EJ Hyams) did accept ‘that my conclusion in that regard will be challenged and may be wrong’.

What does this all mean?

Well, it’s important not to get too carried away. Employment tribunal judgments are not binding on other tribunals and this decision is likely to be appealed. However, if this argument gains traction then the following points are relevant:

  • The decision doesn’t significantly change the risk for gig economy businesses like Addison Lee, which deny holiday pay entirely. They already face unlimited back-pay risks due to Smith v Pimlico Plumbers, which ruled that untaken holiday which the worker has not had the opportunity to take carries-over from one year to the next.
  • Claimants in unlawful deductions cases should include submissions that, per Afshar, any two-year backpay limit is invalid. Remember, this applies to all deductions claims, not just holiday pay ones.
  • Businesses with historic underpayment issues regarding holiday who have taken a strategic decision to continue to underpay – based on the buffer provided by the 2-year limitation on claims – might want to rethink that strategy.
  • The practical impact of Afshar may be limited. The government may introduce primary legislation to replicate the two year limitation which was (allegedly) unlawfully imposed by secondary legislation via the Regulations, if concerned that higher courts will follow Afshar.