Holiday pay compliance has been a slow-burning problem for UK employers for well over a decade. Most businesses are broadly aware that the rules changed.
- That regular overtime needs to be factored into calculations
- That paying basic salary during annual leave and calling it done is no longer enough.
But many have taken comfort in one particular protection – the two-year backstop, which has, since 2015, capped how far back a worker can go when bringing a claim for underpaid holiday.
That protection has just been put under serious pressure.
In January 2025, an Employment Tribunal handed down its judgment in Afshar and others v Addison Lee Limited.
The headline finding that Addison Lee’s drivers were workers, not self-employed contractors, was not entirely surprising given the history of the case. But within the judgment was a conclusion with much wider implications for employers well beyond the gig economy.
The tribunal ruled that the two-year backstop itself is unlawful.
Who were the Addison Lee drivers?
Addison Lee is a well-known private hire company whose drivers had been the subject of employment status litigation before. Back in 2017, a separate group of drivers, the Lange claimants, successfully argued they were workers rather than self-employed.
Addison Lee appealed, but by the time the courts came to consider it, the Supreme Court had already ruled in favour of Uber drivers in a closely comparable case. The appeal went nowhere, and a settlement with those original claimants followed in early 2024.
Around 700 further drivers then brought their own claims, arguing that they too were workers under essentially the same working model.
Addison Lee resisted on two fronts,
- It argued the 2017 findings did not automatically extend to this new group
- That it had changed its business practices in the meantime in a way that altered the picture.
The tribunal was not persuaded on either point.
Finding one – the drivers were workers
Outcome: the drivers win on employment status
Employment Judge Hyams found that Addison Lee’s drivers were workers for the duration of each shift – specifically, from the moment they logged into the company’s operating platform and made themselves available for work.
Addison Lee had introduced new contractual terms in 2021, which, on paper, gave drivers the freedom to refuse jobs. The tribunal found that those terms did not reflect reality. In practice, sanctions continued to be applied to drivers who declined bookings, and the day-to-day operation of the business had not materially changed.
There was one distinction between driver types. Drivers using Addison Lee’s own branded vehicles were considered workers whenever they were logged on. Drivers using their own vehicles or vehicles leased from a third party, described as partner drivers, were workers only from the point they accepted a specific journey, because they could simultaneously offer their services on other platforms.
What this means in practice
The key message here is a familiar one from gig economy case law – the label you put on a working relationship does not determine its legal character. What matters is the reality of how people work.
If your business uses self-employed contractors in a way that involves platform-based working, regular availability requirements, or any kind of sanction for not accepting work, a tribunal will look through the contractual paperwork at the practical reality. It has done so consistently, and it will do so again.
Finding two – the two-year backstop is unlawful
Outcome: potentially very significant for all employers
As workers, the Addison Lee drivers were entitled to paid annual leave under the Working Time Regulations 1998. Having been denied that pay entirely while Addison Lee classified them as self-employed, they were entitled to recover it as an unlawful deduction from wages. The question was how far back they could go.
The Deduction from Wages (Limitation) Regulations 2014, in force since July 2015, cap unlawful deductions claims at two years from the date of the claim. This was introduced deliberately to limit the financial exposure employers faced following a series of court rulings that had expanded what needed to be included in holiday pay calculations.
EJ Hyams held that those Regulations are ultra vires, meaning the government did not have the legal authority to introduce them in the way it did.
The argument is a technical one, but the logic is straightforward.
- The Regulations were made under the European Communities Act 1972, which allowed the government to use secondary legislation to bring UK law into line with EU obligations.
- The right to paid holiday is an EU-derived right.
- But EU law does not require a two-year limit on recovering underpaid holiday – that was a purely domestic policy decision.
- To avoid a legal challenge on the EU principle of equivalence (which says EU rights must not be harder to enforce than comparable domestic rights), the government also extended the two-year cap to all unlawful deductions claims under domestic law, not just holiday pay.
The tribunal found that this overstepped the mark. Rights of such fundamental importance, conferred by a primary Act of Parliament, cannot be curtailed by secondary legislation unless Parliament has expressly authorised it to do so. No such authorisation existed.
On that basis, the two-year cap does not apply, and the drivers’ claims can go back further, potentially as far as 1998, when the Working Time Regulations were introduced.
What this means in practice
It is important to be clear about where things stand. This is a first-instance Employment Tribunal decision. It is not binding on other tribunals. The judge himself acknowledged that his conclusion on the backstop point will be challenged and may be wrong.
The case has been appealed to the Employment Appeal Tribunal, and the Government has confirmed it intends to intervene to defend the two-year limit. If the EAT agrees with EJ Hyams, the ruling becomes binding. If it disagrees, the backstop is restored. The Government could also choose to introduce primary
legislation to reinstate the cap properly, side-stepping the legal argument altogether.
So the backstop has not gone. But it is considerably less certain than it was twelve months ago.
What this means for your holiday pay compliance
The honest answer is that it depends on where you currently stand.
If you are already calculating holiday pay correctly – factoring in regular overtime, commission, shift premiums, and other elements of normal remuneration for at least the first four weeks of leave, then Addison Lee does not fundamentally change your position. You are not sitting on a liability waiting to be uncovered.
But if you have been paying basic salary only during annual leave, or if you have been aware of a holiday pay issue and relying on the two-year cap as a reason not to address it, this ruling should prompt an urgent review.
For businesses using gig economy or flexible workers, the worker status finding reinforces a pattern of case law going back years. If you use platform-based workers, contractors, or flexible staff whose working arrangements look like employment in practice, you need to reassess their status and understand what a worker finding would mean for your holiday pay obligations.
For employers with variable pay, regular voluntary overtime, compulsory overtime, non-guaranteed overtime, commission, and certain regular allowances, all need to be included in holiday pay calculations for the first four weeks of statutory leave. If your calculations have not kept pace with how your employees actually earn, you have a compliance gap, and the backstop ruling means that gap could potentially be explored further back than you might have assumed.
For those taking a watch-and-wait approach, some employers have been aware of underpayments but have taken the view that a capped, two-year liability is a manageable risk compared to the cost of rectification. That calculation has changed. The backstop is not yet gone, but waiting to see how the EAT rules while doing nothing to address the underlying issue is a higher-risk strategy than it was at the start of 2024.
Why now is the time to act
Holiday pay compliance is not just a tribunal risk. From 7 April 2026, the new Fair Work Agency, created by the Employment Rights Act 2025, takes on enforcement of holiday pay with significant new powers, including the ability to bring tribunal claims on its own behalf and to impose unlimited fines for record-keeping failures.
From the same date, all employers must retain holiday pay and annual leave records for six years. That is not just a filing obligation; it is an evidentiary one. If your records cannot demonstrate how you calculated holiday pay, including which variable pay elements you included and why, you will struggle to defend a claim or an enforcement action.
The window to get your house in order is narrowing. The Addison Lee ruling is not yet settled law, but it is a clear signal that the protections many employers have been relying on are under real pressure. The sensible response is to treat it as a prompt – not a cause for alarm, but an opportunity to make sure your payroll processes are in the right shape before the landscape shifts further.
Questions worth asking right now
If you want to understand where your business stands, these are the questions to work through.
On your holiday pay calculations
- Are you including regular overtime, commission, and variable pay in holiday pay for the first four weeks of statutory leave?
- Can you demonstrate, in your records, how those calculations were made?
On your workforce
- Do you have workers who may be misclassified as self-employed, who are in practice working in a way that looks more like employment?
- If a tribunal found worker status, would you have a clear picture of the holiday pay liability that would follow?
On your records and readiness
- Are you retaining adequate leave and holiday pay records — and are those records something you could produce to a regulator or tribunal?
- Are you prepared for the Fair Work Agency’s enforcement powers taking effect from April 2026?
If the answer to any of these is uncertain, now is a good time to find out.
Holiday pay compliance is exactly the kind of area where having the right payroll partner makes a real difference, not just for getting the calculations right, but for being able to evidence that you have done so.
