Supreme Court issues landmark ruling in holiday pay case
By Jo Moseley
Jo Moseley dissects the recent Supreme Court ruling that has clarified key issues relating to the calculation of holiday pay and what is meant by a ‘series of deductions’
The Supreme Court in Chief Constable of the Police Service of NI and others v Agnew has made it much more difficult for UK employers to limit their liability for underpaid holiday claims that have been brought as a series of unlawful deductions.
Workers can bring claims for underpaid holiday either under Regulation 30 of the Working Time Regulations 1998 or as a series of deductions under Section 23 of the Employment Rights Act 1996.
In both cases, the worker has a short three-month window to bring a claim, although the ‘trigger points’ are different. In the case of an unlawful deduction from wages claim, time runs from the date of the last underpayment. Provided workers issue their claims on time, they can include previous deductions as part of a series of underpayments.
That principle was applied, without controversy, until 2014 when the Employment Appeal Tribunal (EAT) handed down its decision in Wood and others v Hertel and Fulton and Bear Scotland Limited, which considered whether voluntary overtime and some allowances should be included in holiday pay.
The Judge took the opportunity to review Section 23 and laid down principles which severely restricted how far back workers could link underpayments of holiday pay. The EAT drew a distinction between the first 20 days leave (so-called ‘European leave’), which had to reflect a worker’s normal pay and therefore meant that overtime etc had to be included, and additional leave which could be paid at basic rates. It ruled that gaps between the different ‘types’ of leave, or gaps of more than three months between deductions, broke the link. This meant that lawyers acting on behalf of employers could often restrict claims to the worker’s current leave year.
Subsequently in England, Wales and Scotland, the government introduced legislation which meant workers could only recover underpaid holiday for a maximum of two years. Northern Ireland didn’t introduce similar legislation.
Background to the case
Lead claimants from 3,380 police officers and 264 civilian employees brought unlawful deductions from wages claims because their employer had not included paid overtime and other relevant payments in their holiday pay calculations. They argued that their collective losses amounted to £40 million. The police accepted that it should have included these payments for its civilian staff, but relied on the technical arguments set out in Bear Scotland to limit its liability.
The issue eventually wound up before the Northern Ireland Court of Appeal which ruled in favour of the claimants. It said Bear Scotland was wrong on this point and that a series wasn’t broken by lawful payments, or by a gap between payments of more than three months.
That judgment was not binding outside of Northern Ireland and other UK employers still legitimately relied on Bear Scotland to limit their holiday pay liabilities. The employer appealed and the UK Supreme Court has now reached a decision which applies to all UK employers.
The Supreme Court agreed with the Northern Ireland Court of Appeal. It concluded that there is no need for workers to demonstrate that underpayments form a continuous sequence, or that all underpayments have to be made within three months of each other. Claimants will, however, have to point to a ‘common fault’ to link payments together, such as the incorrect calculation of holiday pay.
In England, Wales and Scotland, workers will only be able to recover underpaid holiday for a maximum of two years. In Northern Ireland claims can go back to 1998 or to the start of employment for shorter serving employees.
Implications for UK employers
This decision will cause those employers that still aren’t correctly calculating holiday pay real concern, particularly if they have employees in Northern Ireland whose claims could go back 25 years.
The publicity around the case is likely to reignite interest in holiday pay in England and Wales. Staff may start asking questions about whether they’ve been paid correctly, raise grievances and, if these aren’t resolved, bring claims. Unions are alive to this issue, and where they are recognised, may start to ask employers awkward questions.
Employers that have underpaid their staff will need to calculate the extent of their financial exposure and decide what approach to take. One option is to proactively inform staff and arrange to compensate them for their legitimate losses. The other is to quietly start paying staff correctly and work on the assumption that most may not bring a claim for previous underpayments in time.
Jo Moseley is a senior associate solicitor at Irwin Mitchell