Landmark Supreme Court ruling on holiday pay
The Supreme Court has handed down an important decision for employers about holiday pay.
The individuals in the case of Chief Constable of Police Service of Northern Ireland v Agnew were civilian staff and police officers working for the Northern Ireland police force. Their holiday pay had been underpaid.
A series of cases over several years has established that holiday pay should be calculated to reflect an employee’s ‘normal pay’, so that they will receive the same pay when on holiday as if they were at work. The objective is to ensure that an employee isn’t disincentivised from taking holiday. Historically, it was standard practice for many organisations to calculate holiday on basic pay only, ignoring overtime, commission, allowances etc.
The effect of this is that, where employees who normally earn sums in addition to basic pay have only been paid holiday calculated at the basic rate, each incidence of holiday results in an underpayment of, or ‘unlawful deduction’ from wages.
The relevant legislation states that claims for underpaid holiday pay must be made either:
- Within three months of the deduction; or
- If the deduction formed part of a series of underpayments, within three months of the last deduction.
A key issue in this case was whether the underpayments were part of a “series of deductions”, which is something that the case law had been grappling with in recent years.
Back in 2015, in Bear Scotland v Fulton the Employment Appeal Tribunal held that any 3 month gap between deductions would break a series, meaning that an employee could only claim back as far as the gap. This decision allowed employers to use technical arguments to limit the scope for workers to bring claims for underpaid holiday pay stretching back to previous holiday years.
However, doubt was cast on the Bear Scotland decision in the later case of Smith v Pimlico Plumbers when the Court of Appeal gave a “strong provisional view” that Bear Scotland was wrong. The Smith finding wasn’t binding and so it was only a matter of time before we had a final and authoritative decision on this point.
The decision in Chief Constable of Police Service of Northern Ireland v Agnew
The recent case of Agnew has confirmed that the decision in Bear Scotland was wrong, and a three month gap between deductions doesn’t break a “series of deductions”.
In Agnew, the Supreme Court held that whether a number of underpayments have formed a series of deductions is a question of fact. Courts will consider all relevant circumstances when considering this point. Each underpayment should be analysed and compared to the others to decide if it forms part of the series. Some factors that could indicate that a collection of underpayments form part of a series include the continuity of the incidents, their size each time and, in particular, the underlying issue that caused the fault.
In Agnew it was agreed that the underpayments were made because the individuals were paid basic pay only as their holiday pay. Therefore, even though there were sometimes gaps of more than three months, they were all linked as part of a series because they were caused by the same error.
What does this mean for my business?
This is an unhelpful case for employers as their exposure to possible historic holiday pay claims has increased. In Agnew the decision made the difference between the total value of the claim (in relation to a large pool of claimants) increasing from around £300,000 to an estimated £30 million. This massive uplift was exacerbated by the fact that it was a case in Northern Ireland, where the Deduction from Wages (Limitation) Regulations 2014, which limits claims of this type to a maximum of 2 years, was never implemented, meaning that claims could be brought all the way back to the start of employment.
In Great Britain, this type of claim will need to be brought as a claim for ‘unlawful deductions from wages’ and will be limited to two years of back pay, limiting the total exposure for employers. However, it is undeniable that this case has made it easier for individuals to potentially make larger claims in historic holiday pay cases.
Most employers have been reviewing and updating their holiday pay policies and procedures over the last few years as the case law has developed, but if you haven’t undertaken a review recently to ensure that your approach is up to date, it is worth doing so now to gain an understanding of any potential exposure to claims.
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