Clarity from the Supreme Court: no break for employers on holiday pay

A landmark Supreme Court ruling in the case of Chief Constable of the Police Service of Northern Ireland and another v Agnew and others [2023] UKSC 33 has established a new precedent for how the law deals with historic underpayments of holiday pay.  

The judgment may mean employers across the UK face new, potentially sizeable, claims for underpayments, and will prompt them to urgently review their remuneration processes and strategies.

What did the case involve?

The case concerned a claim by approximately 3,700 police staff in Northern Ireland against the Police Service of Northern Ireland (PSNI). The claimants were split into two groups. One comprised police constables or sergeants in the PSNI; the other was made up of civilian employees engaged in a variety of roles by the police authority.

The crux of their claim was that they had been underpaid holiday pay since 1998. Although holiday pay was calculated based on their basic pay, the calculation did not include compulsory overtime that ‘regularly supplemented’ their wages – money that should have been factored into the ‘normal’ pay rules that govern the calculation of holiday pay.

The fact that underpayments had occurred was settled, to the satisfaction of all parties, through the Northern Irish Industrial Tribunal (IT), Northern Ireland’s equivalent to the employment tribunal. It held that overtime payments (and, in the case of ‘civilian’ employees, certain allowances) should be included in the calculation of ‘normal’ pay for the purposes of their annual leave entitlement.  

The issue that had not been resolved – and which ultimately led to the case being heard in the NI Court of Appeal and the Supreme Court – was how far back these underpayments could be claimed, and who was eligible to claim for such historic payments.

The PSNI relied on regulations that require claims for underpayments to be brought within three months of the payment being made. The claimants relied on rules that allow for a ‘series’ of underpayments to be claimed back, ‘provided that the last underpayment in the series was not [made] more than three months before the IT claim’.

The PSNI questioned what constituted a ‘series’ and claimed that only the civilian claimants – not the officers – were able to claim using the ‘series’ provision.

The Court of Appeal found that all claimants were entitled to claim on a ‘series’ basis, and that ‘most, if not all’ of the payments that were being claimed for were in a ‘series’ that was in scope. Importantly, it chose not to follow an earlier decision by the Employment Appeal Tribunal in the case of Bear Scotland Ltd and Others v Mr David Fulton and Others UKEATS/0047/13/BI, that held that any series of deductions is automatically broken by a gap of three months.

The PSNI appealed to the Supreme Court.

The legal foundations

To fully appreciate the significance of the Supreme Court’s eventual ruling, it is worth reflecting on the relevant legislation and case law around holiday pay, drawing on the background set out in the court’s own written judgment.

The European Working Time Directive (WTD) constitutes a sizeable part of annual leave entitlement in both Great Britain and Northern Ireland – giving every worker at least four weeks (20 days) of paid time off.

In Northern Ireland, the WTD was first implemented by the Working Time Regulations (NI) 1998. Under the Working Time Regulations (NI) 2016 (WTR), there is also a domestic entitlement to an additional 1.6 weeks’ ‘additional leave’, up to a maximum statutory combined total of 28 days. The same amount of ‘additional leave’ applies across England, Scotland and Wales through the Working Time Regulations 1998.

The EU WTD sets out how much leave workers are entitled to. But, as the Supreme Court noted, it doesn’t govern how holiday pay is calculated. For this, the WTR draws from another piece of legislation – the Employment Rights (Northern Ireland) Order 1996 (ERO).

This – as the Supreme Court justices noted – ‘largely correspond(s) to the rights conferred in Great Britain by the Employment Rights Act (ERA)’ and broadly gives workers with ‘normal working hours a week’s pay for what they are paid in working those hours for one week’, and those with ‘no normal working hours’ an average of their remuneration for a period’.

Importantly, among other things, the ERO also gives workers a right ‘to not suffer unauthorised deductions from his/her wages’, which includes holiday pay. This also has parallels in the GB ERA.

Lock and Bear

But what constitutes ‘normal pay’?

This is critical to understand as this will impact on the calculation of holiday pay.

In Z. J. R. Lock v British Gas Trading Limited [2014] C-539/12, the European Court of Justice (ECJ) held that commission should be factored into holiday pay calculations. For Mr Lock, commission payments that he received as part of his pay packet, and which constituted a significant part of his usual take home wages, were considered to be just that.

Further, in the case of C. D. Robinson-Steele v RD Retail Service Ltd [2006] C-131/04, the ECJ held that workers must continue to receive normal remuneration during their annual leave. In addition, in Williams & Ors and British Airways Plc [2012] C-155/10, the ECJ held that a worker on holiday is not only entitled to a basic salary, but all remuneration which is ‘intrinsically linked’ to what workers do under their contract.

The principle of ‘intrinsic links’ also had a bearing on the case of Bear Scotland Ltd v Fulton and others [2015]. 

A question here was whether non-guaranteed overtime and other payments had to be provided for leave under the Working Time Regulations. The tribunal in this case found that, under the reasoning of ‘intrinsic linking’ it should. As well as commission, overtime can therefore be factored into ‘normal’ holiday pay.

Timing matters

So, with the law establishing what annual leave workers are entitled to, what can be factored into holiday pay and that they are protected against unlawful deductions, what does it say about how employees can claim if feel they have been incorrectly or underpaid?

One pathway is to raise a complaint under the Working Time Regulations (in the case of Northern Ireland, the WTR (NI) 2016). There is a time limit for doing this, however – claims must be brought within three months of an incorrect payment being made, unless there are clear reasons why this isn’t possible.

In the jurisdictions of Great Britain (England, Scotland and Wales), employees can also make a claim for ‘unlawful deductions’ from their holiday pay under the Employment Rights Act 1996 (ERA). The usual timeframe for making a claim is within three months of the incorrect payment being made.

However, the ERA, together with the case of HM Revenue and Customs v Stringer and others [2009] UKHL 31, also permits that a worker can claim for a ‘series’ of incorrect deductions, provided the claim is made within three months of the last deduction. In Northern Ireland, the equivalent provision is included in Article 55 of the ERO.

As well as establishing that holiday pay could include overtime, the case of Bear Scotland Ltd v Fulton touched on the issue of a ‘series’. It was held that a ‘series’ of unlawful deductions could indeed occur, but that if there was a period of more than three months between such ‘series’, they would not count as being part of the same series, but separate ones – and therefore could not be claimed if the statute of limitations had passed.

The fact that claims can be brought through more than one ‘avenue’ and the fact that the case of Bear Scotland Ltd had put limitations on a series had bearings on Chief Constable of the Police Service of Northern Ireland v Agnew.

Separate from what counted as a series or not, the PSNI held that while the civilian staff in the case could bring their claims against it under both the ERO and WTR routes, and thereby claim for the ‘series’ option that the ERO permits, the police officers could not. This was because police officers are not counted as ‘workers’ under the ERO, so are not eligible for its benefits.  

The Supreme Court ruling

As a brief recap, the two points that the Supreme Court was considering were:

1. Can police staff rely on the ‘series’ extension in the ERO for underpayments going back more than three months?
2. Could underpayments count as a series, and if so, under what circumstances?

Ultimately, the Supreme Court upheld the decision by the NI Court of Appeal, and unanimously rejected the PSNI’s case.

On point (a), the Supreme Court ruled that police officers could rely on the ‘series extension’, under the principle of equivalence.

The judgement states: “We therefore consider that a worker with rights to holiday pay under the WTR (NI) 2016 who is not also a worker for the purposes of the ERO is not precluded from relying on comparator procedures in the ERO for the purposes of applying the principle of equivalence to his or her enforcement of the rights he or she has.”

On point (b) – the question of a series – the court acknowledged that the purpose of the series exemption was to protect employees, some of whom may be vulnerable, against the short, usual, three-month time limit for making a claim where they suffer repeated wage deductions. 

It held that the idea that a three-month gap between deductions automatically breaks the series – as asserted in Bear Scotland Ltd v Fulton – didn’t support this objective. It might even produce undesired and unfair consequences – for example, allowing a ‘canny operator to game the system’ by strategically spacing out unlawful payments. It also noted that this put an ‘unnecessary burden’ on the employee by requiring them to bring a new claim every three months, rather than a single one for what was repeated behaviour.

In response to the question of what constitutes a series, the Supreme Court highlighted that this would need to be judged on the facts of each case. This could include factors such as the impact and size of the deductions, how often they happened, and how they came to be made. To this end, the court also confirmed that a lawful payment by an employer didn’t – by its own virtue – break a series.

Which holiday comes first?

As a related issue, the court also provided clarity on ‘which’ holiday the requirements to pay ‘normal remuneration’ for pay apply to.

Under the EU WTD, ‘normal pay’ is only required for the first 20 days of leave. In the case of Bear Scotland, it was ruled that there is an ‘order of operations’ to how annual leave is taken: WTD time comes first, followed by any ‘additional leave’, followed by any other contractually stipulated time off.

The NI Court of Appeal – upheld by the Supreme Court – decided that all of these types of leave are practically the same. This adds another block to establishing a ‘three-month gap’.

What are the implications?

The fact that this is a Supreme Court judgment makes it binding across the whole of the United Kingdom. Its ruling on the nature of a series has a likely significant bearing on holiday pay claims. When it comes to incorrect holiday payments, the Supreme Court has been clear: there’s (little) rest for the wicked.

Employees whose holiday pay hasn’t taken account of regular overtime, and whose holiday spanned or whose holiday pay was received at intervals of more than three months will be able to argue that unlawful deductions have been made, in a series – provided that the individual facts and circumstances of the case permit it.

Employers will also no longer be able to claim that a chain of deductions are broken if an employee takes ‘additional’ WTR leave or a contractual holiday, falling at the end of a year.

In Northern Ireland, such claims could potentially stretch as far back as the existence of the underpinning legislation (in this case, the Working Time Regulations (NI) 1998). However, it is important to note that there is an overarching time limit on unlawful deduction of holiday pay in England, Scotland and Northern Ireland of two years.

Ultimately, employers will need to prepare to manage an influx of such claims, and should be reviewing their current pay processes – particularly for areas like holiday pay – to ensure they are fully compliant with the law.

Sejal Raja is a partner at Weightmans
weightmans.com

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