Important development in holiday pay claims

The Supreme Court has issued a significant judgment on holiday pay in the case of Chief Constable of the Police Service of Northern Ireland v Agnew. In it, the Court confirmed that a gap of three months or more between a series of deductions will no longer defeat a claim for unlawful deduction from wages. This will have significant implications for backdated holiday pay claims, as this blog explains.

Unlawful deduction from wages

It is unlawful for an employer to make a deduction from a worker’s wages unless it is required or authorised either by statute or a provision in a worker’s contract, or the worker has given their prior written consent.

A claim for unlawful deduction from wages must be brought within three months from the date of the alleged deduction. Where a complaint is brought in respect of a series of deductions, the time limit begins to run from the date of the last deduction in the series.

In the 2014 case of Bear Scotland v Fulton, the Employment Appeal Tribunal ruled that a gap of more than three months between underpayments of holiday pay would break the series of deductions required to bring an unlawful deduction from wages claim for underpaid holiday pay. In those cases, a claimant would be unable to claim backdated holiday pay beyond the “break” in deductions.

Chief Constable of the Police Service of Northern Ireland v Agnew

In this case, employees of the Police Service of Northern Ireland had, since the introduction of the Working Time Regulations 1998 (WTR), been paid their basic pay while on annual leave, without regard to overtime or certain allowances. This was contrary to case law from the Court of Justice of the European Union which requires workers to be paid “normal pay” during annual leave, ie inclusive of regular overtime, bonus or commission payments.

The Supreme Court decision

In Chief Constable of the Police Service of Northern Ireland v Agnew, the Supreme Court has upheld the position of the Court of Appeal in Northern Ireland and ruled that a series of deductions will not be broken by either:

• a gap of more than three months in a series of holiday pay deductions, nor
• an instance of a correct payment.
  
  

In doing so, the Court has overturned the EAT decision in Bear Scotland. 

The Court held that in order for a series of deductions to be established, the subject matter of each deduction must be sufficiently similar (each deduction must be “factually linked to its predecessor and successor by a common fault or unifying or central vice”). In this case, the common fault linking each unlawful deduction was that holiday pay was calculated by reference to basic pay rather than normal pay. Once that common link was established, the Supreme Court concluded that:

“It mattered not that the interval between these payments was from time to time in excess of three months; and these intervals of more than three months did not, in and of themselves and as a matter of law, break the series or bring it to an end.”

In coming to this decision, the Supreme Court noted that an important general purpose of the legislation which the appeal concerned is to give workers a measure of protection from exploitation, including protecting vulnerable individuals from being paid too little. In the Supreme Court’s view, the same considerations are relevant to the protection of workers who suffer unauthorised deductions from their holiday pay. The Court found that the imposition of a mandatory cut off after an interval of three months risked undermining this purpose and resulting in unfair consequences.

Employer liability for backdated holiday pay

For employers who have been underpaying holiday pay (for example, because it was calculated on the basis of basic pay only, rather than including overtime or commission etc), this decision could expose them to liability for backdated holiday pay. The extent of this liability will depend on where in the UK the employer or their employees are based:

In Northern Ireland

This case has potentially extremely significant ramifications for employers in Northern Ireland, or those who have offices there. Indeed, many thousands of holiday pay cases have reportedly been stayed pending the Supreme Court decision, all of which will now be bound by that decision once the stay is lifted. Liability for holiday pay in Northern Ireland could now potentially extend back as far as 1998, when the WTR was introduced (or when employment started if later than that). For the Appellants in this claim, it is estimated that the cost of remedying their failure to calculate holiday properly has increased as a result of this decision from £300,000 to in excess of £30m.

In Great Britain

The implications are unlikely to be as significant for employers based in Great Britain, where the Deduction from Wages (Limitation) Regulations 2014 placed a limit of two-years on any unlawful deduction claims brought after 1 July 2015. Although the Supreme Court decision may lead to increased challenges of these Regulations, currently they will serve to limit the exposure of employers in the UK to backdated holiday pay claims (the Regulations did not apply to Northern Ireland, which is why there is such a difference).

It should be noted that the Supreme Court decision will have implications for all unfair deduction from wages claims, not just those relating to holiday pay.

Next steps for employers

The Supreme Court decision has been much anticipated and is likely to result in bringing the issue of holiday pay back on the radar of employees. Employers who are concerned they may face a liability for unlawful deductions following the Supreme Court decision are advised to carry out an audit of holiday pay to understand the extent to which they may be exposed. It is advisable to seek legal advice in the event this reveals any potential issues.

One option open to employers who are currently paying incorrect holiday is to ensure that going forwards payments are made correctly for any future holiday periods. This is because, notwithstanding the Supreme Court’s decision, the limitation period for a claim for unlawful deduction from wages remains three months from the last unlawful deduction. While a single lawful payment will not now automatically break a series of deductions, it will start the clock on the limitation period, which may increase the chances of that period passing without a claim being made. 

Employers are also advised to keep track of proposed changes to holiday pay and entitlement more widely to ensure that their holiday practices remain up to date. For example, see our blogs on Important employment law reforms announced and Government consultation on holiday entitlement for part-year workers following Harpur Trust v Brazel.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2023