Significant Holiday Pay Case Ruling

Yesterday (4 October 2023), The Supreme Court (SC) delivered its judgement in the case of Chief Constable of the Police Service of Northern Ireland and another v Agnew and others. This is a case that challenges the current legal position that an employee must bring a claim for unpaid holiday pay within three months of the deduction. Or in the case of a series of underpayments, within three months of the last deduction.

The background

Back in 2019, Agnew and others claimed unlawful deduction of wages at the Northern Ireland Court of Appeal, arguing that their employer – the Police Service of Northern Ireland used the wrong calculation when calculating their holiday pay. They believed that their holiday pay should have been based on their ‘normal’ pay, i.e. to include overtime payments, rather than ‘basic’ pay.

They relied on a previous case ruling (Bear Scotland v Fulton in 2014) which had ruled that where an employee is obliged to work overtime (when requested), that these additional hours must be included when calculating holiday pay. The Bear Scotland v Fulton case also established that claims must not have a gap of three months or more between holiday underpayments. As a result, the Deduction from Wages (Limitation) Regulations 2014 was introduced and came into force in England, Scotland, and Wales only, not Northern Ireland. The Regulations introduced a ‘back stop’, meaning that employees could not make a claim for unlawful deductions from wages for claims going back more than two years.

For Agnew and others, the Northern Ireland Court of Appeal ruled in their favour and that a three-month period of correct payments would not break a series of deductions and prevent claims. If underpayments could be linked, then they could form a series even if more than three months apart. The Northern Ireland Court of Appeal found that the Police Service of Northern Ireland had failed to include regular overtime when calculating holiday pay and owed their employees an amount of around £30 million in unpaid holiday pay.

The Chief Constable of The Police Service of Northern Ireland accepted that the holiday pay should include overtime, but challenged how far back a claim for holiday pay could be made and if underpayments were broken by a three-month gap in the series of deductions.

It was because of these issues, that they progressed the matter to the Supreme Court. The case was heard in December 2022 at the Supreme Court with the ruling handed down 4 October 2023.

Supreme Court Judgement

When reaching a decision, the Supreme Court considered both the Working Time Regulations (WTR) and the Employment Rights (NI) Order 1996 (ERO); both set out a different approach to how far back claims can be raised. The WTR on the one hand allows for claims to be brought for the three-month period prior to the date of a claim only, whilst the ERO allows claims of underpayments to be brought within three months of the last in the series of deductions, and so allows claims to be brought for periods that go much further back than the timeframe set by the WTR.

In terms of whether a gap of more than three months could still allow for claims of unlawful deduction of wages, the Supreme Court agreed with the previous ruling by the Court of Appeal that the aim of the legislation was to protect workers against exploitation and therefore, claims can be brought.

It has concluded that when considering whether the deductions form a series, all relevant facts must be considered, including:

• The similarities and differences between the deductions
• The frequency of the deductions
• The size and impact of the deductions
• How they came to be made and
• What links the deductions together.

Of course, where there are other relevant circumstances, these would be considered also.

The Supreme Court found that The Chief Constable of The Police Service of Northern Ireland had been at fault by only paying holiday pay based on basic pay not normal pay. Therefore, this was the factor that could link all the deductions and therefore allow for claims to be raised that go back further than three months from the last deduction.

Implications for employers

So, what are the implications for employers? Firstly, it must not be forgotten that for England, Scotland and Wales, the Deduction from Wages (Limitation) Regulations 2014 amended the Employment Rights Act 1996 by limiting claims for backdated holiday pay to two years. However, for those operating in Northern Ireland, where these Regulations do not exist; there is a risk of liability for claims dating back to when the Working Time Regulations came into force – 1998!

Secondly, the risk of a claim arises where holiday pay has been underpaid, as this case demonstrated when basic pay was used in the calculation instead of normal pay. The requirement to include overtime and other allowances when calculating holiday pay has been in place for several years, so we’d expect most employers, if not all, are already calculating it in this way.

Should there be cases where holiday pay is calculated using basic pay only, then this ruling now means that employees can make a claim for any underpayment in a series, even if the underpayments are more than three months part and assuming there is commonality between them as set out earlier in this article.

What to do next?

This is a significant ruling, that has the potential to incur serious risk and a financial burden to those businesses that may not have been calculating holiday pay correctly. We would advise carrying out a review of your current holiday pay processes and calculations to establish where there may be liability, and to help in developing an appropriate plan of action for addressing.

If you would like help and support in doing this, you can contact us on 0844 324 5840 for further guidance and information.