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The Deduction from Wages (Limitation) Regulations 2014

By Daniel Dyal and Chesca Lord

Following the decision of the Employment Appeal Tribunal in Bear Scotland, the Government announced that it would set up a task force to mitigate the impact of the decision on businesses. This has culminated in The Deduction from Wages (Limitation) Regulations 2014

The Regulations seek to limit how far back employees can go in making claims for holiday pay. However, the Regulations have been drafted very widely and affect almost all types of claims of unauthorised deduction from wages. The reason for this is obscure but, we think, identified below.

These short and ostensibly innocuous regulations are in fact controversial and, on one view at least, an affront to the sovereignty of Parliament.

Regulation 2

Regulation 2 amends the Employment Rights Act 1996 (‘ERA’) to insert two new sub-sections into section 23 with effect from 1 July 2015. The intended effect of the amendment is to limit how far back an employee can go when claiming a series of deductions from wages. The limit is two years ending with the date that the claim is presented.

The amendment applies to all claims for wages falling within the meaning of s.27(1)(a) ERA, namely: “any fee, bonus, commission, holiday pay or other emolument referable to his employment, whether payable under his contract or otherwise.” This includes almost all forms of wages.

The Regulations are a piece of secondary legislation which make a sweeping reform to the right not to suffer unauthorised deductions from wages. That is a right enshrined in primary legislation, the ERA. The Secretary of State can only amend primary legislation through the use of regulations if there is an enabling power permitting her to do so, and then only to the extent of that power.

The Regulations purport to have been made pursuant to s.2(2) of the European Communities Act 1972:

“…at any time after … any designated Minister …may by …, regulations …make provision—

(a) for the purpose of implementing any EU obligation of the United Kingdom, or enabling any such obligation to be implemented, or of enabling any rights enjoyed or to be enjoyed by the United Kingdom under or by virtue of the Treaties to be exercised; or

(b) for the purpose of dealing with matters arising out of or related to any such obligation or rights or the coming into force, or the operation from time to time, of subsection (1) above;

and in the exercise of any statutory power or duty, including any power to give directions or to legislate by means of orders, rules, regulations or other subordinate instrument, the person entrusted with the power or duty may have regard to the objects of the EU and to any such obligation or rights as aforesaid.”

Given that the vast majority of unlawful deduction from wages claims have nothing whatsoever to do with EC Law it is not obvious that the purported enabling provision in fact permits the Secretary of State to amend the ERA in the way the Regulations do. Indeed on the face of it, the more obvious reaction is that the Regulations are ultra vires.

Neither the explanatory note nor the impact assessment that accompany the Regulations give any real clue as to the basis on which it could be argued that the amendment to the ERA is enabled by s.2(2) of the European Communities Act 1972.

We are therefore left to guess at (i) why the Regulations are drafted so widely and (ii) on what basis the Government considers it has power to draft them so widely. We think we know the answers.

The principle of equivalence provides that in certain situations a limitation period in respect of an action for a claim arising out of EC law must not be less favourable than for similar actions based on domestic law. This was one reason why, in HMRC v Stringer the House of Lords, Lord Neuberger in particular, held that a claim for holiday pay could be brought as a claim for unlawful deduction from wages (with its favourable series of deductions provisions). Holiday pay, Lord Neuberger considered, was sufficiently similar to other types of pay which amounted to wages under the ERA, that the principle of equivalence required holiday to be included within the definition of wages so as to avoid a less favourable limitation period applying to it as compared to other wages claims.

If the Regulations had been limited to holiday pay and not other types of wages they would have been vulnerable to challenge based upon the principle of equivalence. There would have been less favourable limitation provisions in relation to holiday pay (in part an EC Law right) as compared to similar rights based on domestic law. This, it seems, is the reason why the Regulations have been drafted so as to encompass other types of wages claims which have no basis in EC Law.

The net effect of all of this is a probable argument by the Government, should the Regulations be challenged, that they are not ultra vires because the amendments to primary legislation are for “the purpose of dealing with matters arising out of or related to” the implementation of the Working Time Directive to use the words of s.2(2) of the European Communities Act 1972. The amendment to domestic rights is needed in order to limit claims for holiday pay without breaching the principle of equivalence.

If this is the basis on which the Government contends that the Regulations are vires the argument is a strained one. It will be interesting to see whether or not the Regulations are judicially reviewed. If they are, there is clearly a chance that they will struck-down as ultra vires.

There is in any event a deep irony in all of this. The Government has intervened to mitigate the impact of EC law. It has done this through the use of executive power rather than through an act of Parliament. In so doing the Government has also amended statutory rights which have nothing to do with EC law and which are enshrined in primary domestic legislation. The irony is that EC law generally enhances workers’ rights, and is much maligned for that reason. Yet the Government has used the provisions of the European Communities Act 1972, which essentially exist in order to give effect to EC law, in order to curtail employment rights which have no basis in EC law. The irony is deepened if one considers the particular primary legislation which is being amended by the use of executive powers. Protection from unlawful deductions from wages is one of the most ancient of employment rights; it is a right which has existed in one form or another since long before the European Community existed.

Regulation 3

Regulation 3 introduces an amendment to Reg 16 WTR to state explicitly that the right to paid annual leave under Reg 16 WTR does not confer any contractual right.

The aim is to quell fears that workers could seek to recover holiday pay via contractual claims in the civil courts taking advantage of the generous six year limitation period for breach of contract claims. It was always going to be difficult to argue that Reg 16 WTR created a contractual as well as a statutory right and this will make it yet harder.

Conclusion

Although the Government claims to have “tackled businesses’ concerns” by implementing these Regulations it remains to be seen whether it has done so. The Regulations may trigger an influx of grievances and/or litigation prior to 1 July 2015, and the Regulations do not offer any protection in relation to back pay in existing claims.

Moreover, it remains to be seen whether the Regulations will be judicially reviewed and if so whether they stand up or are struck down.

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