Landmark Supreme Court Decision on holiday pay – cost of over £30m to UK employer

The recent Supreme Court decision in Chief Constable of the Police Service of Northern Ireland and another v Agnew and others (Northern Ireland) [2023], has provided clarity on how claims for historic underpayments of holiday pay should be dealt with.

It has been held that a three month gap in a series of deductions claim for underpaid holiday pay does not automatically break the chain of deductions if the deductions are factually linked by the same underlying cause.

This decision is significant for all UK employers, and not only relates to underpaid holiday pay but also any claim for unpaid wages against UK employers under unlawful deduction from wages provisions.

It means that claims for unpaid wages can still be made even where there is a long gap in between the payments, provided the reason for the underpayment, or lack of payment, is the same.

Background

In 2015 police officers and civilian employees of the Police Service of Northen Ireland (PSNI) brought claims against PSNI to recover sums which they should have been paid since 1998 as part of their holiday pay. They claimed that their holiday pay had been calculated based on their basic pay alone, not taking into account the overtime that they regularly worked and other allowances.

They argued that these additional payments formed part of their ‘normal’ pay. Case law had already established at this point that normal pay should be paid to workers during periods of annual leave so as to not disincentivise workers from taking their holiday.

PSNI accepted that their employees had been underpaid during their holidays. However, a key issue in the case was how far back payments could be claimed, and whether the payments claimed were all part of a series of deductions or whether there was a break in the deductions and as such the ‘chain’ was broken.

The Court of Appeal held that a series of deductions would not necessarily be broken by a gap of three months or more, provided the deductions were from a common fault,  the fault in this case being that holiday pay had been based on basic pay alone rather than normal pay. This departed from the decision of the Employment Appeal Tribunal (EAT) in Bear Scotland v Fulton [2015], where it was held that a gap of more than three months in a series of deductions will break the chain, and as such the payments before the gap will be time-barred.

PSNI appealed this decision to the Supreme Court.

The Supreme Court decision

The Supreme Court dismissed the appeal unanimously. In its recent ruling it held that the decision in Bear Scotland was wrong and that a gap of more than three months in a series of deductions does not necessarily break that series, provided the deductions  are linked by the same underlying cause. This means that claims for deductions from wages can be brought even where there is a gap of more than three months between deductions in a series.

The Supreme Court also held that it cannot be assumed the first four weeks of a worker’s holiday constitutes their statutory entitlement under the Working Time Regulations but rather, annual leave entitlement is to be looked at as a whole, forming part of one single composite pot.

This decision in Agnew means that more than 3,700 PSNI employees will be paid for their underpaid holiday pay dating back to 1998 and amounting to more than £30m.

Whilst this is a Northen Ireland case, the Supreme Court decision is still binding on employers in Britain. However, unlike in Northen Ireland, claims for unlawful deduction from wages in Britain can only be backdated for up to two years from the date of the claim. For the whole of the UK, claims must be brought within three months from the date of the last deduction.

Impact – what this decision means for employers

In its ruling, the Supreme Court acknowledged the impact its decision would have on employers across the UK as follows:

“[…] the answer to the legal question now before us may have a bearing on thousands of claims each year and so have a cumulative impact which is very significant indeed.”

It also noted that:

“[…] an important general purpose of the legislation… is to give workers a measure of protection from exploitation… it’s among other things, to protect vulnerable workers from being paid too little for the work that they do.”

Following this landmark Supreme Court decision, employers across the UK may face more claims from workers for compensation for unpaid or underpaid holiday pay. This will likely have the biggest impact on businesses where a significant amount of workers’ pay comes from overtime or commission payments.

Claims brought after 1 July 2015 in Britain can only be brought in respect of two years’ worth of backdated payments. However, the decision in Agnew could still potentially cost British businesses substantial amounts and an increase in the number of claims for underpaid holiday pay may be seen over the coming months.

Advice for employers

• Review your internal holiday pay practices to ensure that workers are paid their normal pay during their holidays, not just their basic pay. If you have employees that regularly work overtime or receive regular commission or bonus payments linked to their personal performance, it may be that their holiday pay ought to reflect these payments. The sooner such issues are rectified then the less potential financial liability there is to the business in the event a worker brings a related claim. The decision in Agnew demonstrates that the cost to an employer can be considerable, particularly if it is a larger workforce.
• When in doubt, contact an employment lawyer for advice.