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Holiday Pay – What’s next for employers?

In a landmark ruling, the Supreme Court has once again thrust the issue of holiday pay into the spotlight, meaning that some employers may face greater liability for underpayments of holiday pay than they have anticipated or provided for.

Just when employers were feeling comfortable that the position regarding the calculation of holiday pay was fairly settled (albeit somewhat complicated), the Supreme Court has thrown a curveball with its ruling in Police Service of Northern Ireland and another v Agnew and others. Although this was a case determined under Northern Irish employment laws, the judgment applies equally to workers in England given the equivalent statutory provisions.

The facts

This case was brought by constables and civilian employees of the Police Service of Northern Ireland (PSNI) and related to claims for underpayments of the pay which they had received whilst on holiday. Their pay during these periods had been calculated based on their basic pay only, and had not taken into account other payments, including compulsory overtime. Instead, they should have received their “normal remuneration” whilst on holiday, at least in respect of any holiday which they had taken as a result of rights flowing from the EU Working Time Directive (as confirmed by various cases in both the European and English courts). The parties agreed that there was an underpayment due, but disagreed over how far back the historic claims could go.

The law

The relevant statutory provisions (which are equivalent to those found in the Employment Rights Act 1996) state that claims must generally be brought within a strict 3 month time limit from any particular underpayment. However, where there is a “series” of underpayments, claims can be brought within 3 months of the last in this series.

PSNI argued that all claims that arose from deductions that were more than 3 months old should be time barred. The employees argued that these deductions should be treated as a series, which would greatly extend the number of claims that could be brought. The difference in value between these two positions was estimated at £300,000 vs £30 million.

The Judgment

The Supreme Court agreed with the employees and found that they were entitled to link underpayments for holiday pay as part of a “series” of underpayments.

Importantly, the Supreme Court expressly disagreed with the previous judgment in Bear Scotland v Fulton when applying the “series” test. In the Bear Scotland case, the EAT had found that any gap in a series of deductions that lasted for 3 months or more broke the series of deductions and extinguished the ability to bring any further historic claims.

The Supreme Court agreed with UNISON who argued this was inherently unfair as it meant that “a canny operator” could “game the system” by spacing out payments over a period of more than three months. It would also unfairly disadvantage employees who opted to take holiday more than three months apart. The only way to successfully bring claims if this were correct would be for employees to bring multiple claims arising from each deduction, which the Supreme Court found would impose “a wholly unnecessary burden” on employees.

Instead, the Supreme Court found that the period of time between deductions did not determine whether it formed part of a series, rather this was:

essentially a question of fact, and in answering that question all relevant circumstances must be taken into account, including, in relation to the deductions in issue: their similarities and differences; their frequency, size and impact; how they came to be made and applied; what links them together, and all other relevant circumstances“.

In addition, they specifically found that the fact that a payment had been made properly did not break the series of deductions. In other words, if an employer pays holiday pay correctly on one occasion, it does not mean that a claim cannot be brought as a result of a series of deductions, and this claim could include historic underpayments.

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The implications

In relation to the claim against PSNI, this means the employees can, in theory at least, seek compensation for deductions arising all the way back to when the relevant regulations were introduced in Northern Ireland (1998).

It is important to note that the position in England is (at least for the time being) different, as there is a statutory backstop on unpaid holiday pay claims of 2 years as a result of specific Regulations on this point (which were not extended to Northern Ireland).

Other legal issues discussed

As a final point, the Supreme Court considered some of the issues as to how annual leave is classified. Strictly speaking different rights to pay entitlements, rescheduling, carry over of leave etc, are associated with annual leave depending on whether it relates to the 4 weeks’ annual leave derived from the European provisions, the additional 1.6 weeks’ leave derived from specific provisions under domestic law, or under terms of the employee’s contract of employment. For example, holiday pay for the 4 week period derived from European legislation has to be calculated based on “normal remuneration”, whereas holiday pay during the additional 1.6 weeks’ leave entitlement derived from domestic legislation can be calculated based on basic pay only. Previously, it had been widely accepted that annual leave based on EU law would be taken first, followed by the other types of leave.

The Supreme Court disagreed with this analysis and concluded that labelling is unimportant to workers as they will “look at their annual leave entitlement as a composite whole“, and, as such all types of leave “must form part of a single, composite pot“.

For some employers, this will not be an issue, as they will already apply the more generous provisions, particularly in relation to calculating holiday pay, to all periods of annual leave. This is often the case for commercial reasons or administrative convenience. However, for those who have attempted to reduce their holiday pay liability by paying at a reduced rate for “additional” annual leave periods, this ruling will no doubt prove problematic, as this judgment leaves employers in an unenviable position of uncertainty about the rights associated with different periods of annual leave.

What does this mean in practice for employers?

  • Holiday pay underpayments must normally be brought within a strict 3 month time limit of the deduction taking place
  • Unless they form part of a series of deductions, in which case the time limit is 3 months from the last in the series
  • Whether there is a series will depend on an analysis of all the facts, including the similarities between them, how often they happened, their size and the reason why they were made. The key issue is whether there is a factual link between them
  • The time between deductions does not break the series as a matter of law (although it may do as a matter of fact)
  • Making a payment correctly at any point also does not break that series. However, it may do so as a matter of fact, if, for example, the correct payment marks the end of the series
  • Employers in England can still rely on the two year backstop for claims (although it is worth keeping a careful eye on this as it may well be subject to future challenge)
  • Prudent employers may wish to pay “normal remuneration” for all periods of annual leave, given the uncertainty how entitlement to annual leave is derived

What should employers do now?

In our experience, we often see these sorts of issues arising either as a result of grievances and complaints from employees (whether individuals or groups of individuals/trade unions etc) or during a due diligence process when a business is preparing to be sold/bought.

To ensure you are able to respond proactively to any challenges rising from this judgment, you may want to undertake an audit of your holiday pay arrangements to make sure they meet the requirements, with a view to identifying any current or historic issues. If issues are identified, you will need to think about how best to resolve them. For example, you may want to rectify the position going forwards and end any non-compliance; this would start the three month clock running for any claims. You might decide to make back payments to employees to rectify any historic non-compliance. Alternatively there might be other commercial or legal solutions that are appropriate based on your particular business circumstances.

Given the highly technical and complicated nature of these legal issues, it is worth taking specific, expert advice in relation to them. If you have any concerns about how this may impact your organisation, please do get in touch with Laura Darnley, or another of our expert Employment Lawyers.