Supreme Court hands down ruling on holiday pay

Supreme Court decision on holiday pay rules that a gap of three months between underpayment of holiday pay does not break the chain in a series of deductions.

On 4 October 2023, the Supreme Court handed down its hotly anticipated decision on whether historic holiday pay claims can be brought where there are gaps of three months or more between a series of underpayments.

It is now established that a gap of three months between underpayments of holiday pay (or other pay technically) does not automatically break a series of deductions.

In a nutshell, this is a big deal because it makes it easier for employees to claim underpayments stretching back over a longer period, increasing exposure for employers who have not been paying holiday pay correctly. The potential exposure for employers in Northern Ireland is even larger than for employers in Great Britain.

Holiday pay before this Supreme Court decision in Agnew  

Claims for underpaid holiday are usually presented as a claim for unlawful deductions under the Employments Rights Act 1996 because an employee can claim for all underpayments in a series (linking them together in effect) whereas a claim under the Working Time Regulations can only usually extend back three months from the date of a claim.

In 2014 the EAT delivered a judgment known as Bear Scotland which set down much of the current rules for calculating holiday pay in Great Britain including that:

• There was a difference between the 20 days holiday derived from the Working Time Directive ('Euro Leave') and the additional eight days derived from the Working Time Regulations 1998 ('UK Leave').
• Holiday pay for Euro Leave must be based on "normal remuneration" (which case law has established means factoring in most payments such as commission, overtime and allowances). By contrast, holiday pay for UK Leave only needed to be calculated in accordance with the provisions of the Working Time Regulations 1998 (which would exclude anything other than basic pay for those with normal working hours).
• Euro Leave would be treated as being used up first in any leave year.
• A gap of three months or more between unlawful deductions would breaks a series of deductions meaning that an employee would not be able to claim for any underpaid holiday before a break of such length.

In January 2015, the Government introduced legislation in England, Scotland and Wales (but not Northern Ireland) which prevented claims made on or after 1 July 2015 for underpaid holiday from going back over a period of two years.

The Agnew case – on a series of deductions

Unison represented 3,380 police officers and 364 civilian police offices of the Police Service of Northern Ireland ('PSNI') to bring employment tribunal claims in Northern Ireland relating to underpaid holiday by PSNI.

The Claimants were only paid basic pay when they took holiday. It did not factor in overtime (which for police officers was usually significant) or other allowances.

PSNI accepted that the Claimants were underpaid (because their holiday pay did not reflect normal remuneration in line with ECJ case law and Bear Scotland) but disputed the period over which the Claimants were entitled to recover the underpayments. In particular, they relied on the Bear Scotland decision which would suggest that a gap of three months between underpayments would break the chain of causation (so massively limiting the period of time for which the underpayments could be claimed).

In relation to the gap in deductions, the Supreme Court indicated that the purpose of the legislation in relation to unlawful deductions was to protect vulnerable workers from being underpaid. A gap or three months or more does not break a series of deductions. What constitutes a "series" of deductions (i.e. which can be linked together going backwards notwithstanding a gap of three months or more) is a question of fact. In this case, the fact each underpayment was an underpayment of holiday because it had been paid at basic rate only was sufficient to link them as a series.

What does the decision regarding a series of deductions mean for employers?

If you have been calculating holiday pay correctly for some time, this decision should carry limited concern for you.

However, this decision means potentially large liabilities for any employer in the UK who has not been paying holiday pay to reflect "normal remuneration" (so factoring in overtime, commission, allowances etc). Workers who have been underpaid holiday (say because they have only been paid it at basic rate) can lodge a claim within three months of the last deduction (i.e. when they last took holiday) for the underpaid element of their holiday pay and can seek to link that deduction with all others.

In Great Britain this would, currently, be limited to the two year backstop on unlawful deductions. No such backstop legislation was introduced in Northern Ireland though, meaning claimants there can potentially seek to claim underpayments going back to 1998 (when the Working Time Regulations were implemented). In the case of Agnew, the liability of the PSNI is estimated to be between £30-40 million.

The Agnew case – on different types of holiday

The Supreme Court also confirmed that Euro Leave, UK Leave and additional contractual holiday was not necessarily taken in sequence and, where it is not possible to distinguish the different types of leave it should be treated as one single pot (just as the employee would consider it to be). However, treating holiday as one pot of leave sits at odds with the fact that case law and regulation mean that different rules apply to different types of leave (so the "normal remuneration" requirement technically only applies to Euro Leave for example).

It is possible (although not clear) that wording in a contract or a holiday policy setting out the order in which leave will be considered to be taken by the employer could enable a distinction to be drawn sufficient for the different types of leave to be separated. The practice of treating different types of leave differently is uncommon in practice – and would sit sensibly alongside this latest decision and the Government's stated intention to move to a position of creating one single pot of entitlement (which they are proposing can be paid on a more simplified basis).

What do you need to do?

Make sure that you understand how holiday pay has been calculated in your business over the recent period (e.g. over last six months). Check that it does factor in all necessary premiums, allowances, overtime, commission and incentive bonuses. If it does, you have limited exposure arising from this decision. If it does not, do contact us for more detailed advice, and consider implementing a correction to holiday pay going forwards as soon as possible.