Whilst the summer holidays may feel like a distant memory as we move into autumn, the issue of holiday pay came before the UK’s highest court on Wednesday. In what was an eagerly awaited decision dealing with the complex issue of holiday pay calculation and one which will have far reaching implications for employers across the United Kingdom, the Supreme Court in Chief Constable of the Police Service of Northern Ireland and another v Agnew and others unanimously dismissed the Appellants’ appeal.

Facts

Industrial tribunal claims were lodged in Northern Ireland by over 3,000 police and civilian employees against the PSNI in relation to holiday pay being calculated by reference to ‘basic pay’ rather than by reference to ‘normal pay’ (which includes basic pay, overtime and various other allowances). The claims date back to when the Working Time Regulations 1998 (WTRs) were first introduced.

The tribunal upheld the claims and, in so doing, held that the decision in Bear Scotland v Fulton was wrong to find that a gap of three months or more would automatically break a ‘series of deductions’ for the purposes of a claim for holiday pay. The PSNI appealed the tribunal’s decision to the Court of Appeal of Northern Ireland.

Court of Appeal Decision

The Court of Appeal held that a ‘series of deductions is not ended, as a matter of law, by a gap of more than three months between unlawful deductions nor is it ended by a lawful payment’. To hold otherwise would, said the court, lead to ‘arbitrary and unfair results’. Instead, identification of the factual link in an alleged series of deductions is what determines whether correct payments of holiday pay breaks the series. If a series of payments is broken by a lawful payment of holiday pay, if the lawful payment comes about ‘by virtue of the common fault or unifying or central vice that holiday pay was calculated by reference to basic pay rather than normal pay’ then the series of deductions is not broken. Indeed, there was nothing in the Employment Rights (Northern Ireland) Order 1996 that would set a limit on the length of gaps between unlawful deductions, and, while a series of underpayments must be factually linked, a three month gap between the underpayments would not necessarily break the series.

Other findings to emerge from the Court of Appeal decision include the following:

• In Bear Scotland the EAT held that EU leave is deemed to be taken first, followed by UK leave (the extra 1.6 weeks under reg. 13A of the WTR) and then contractual leave. Not so said the Court of Appeal. Workers are entitled to all leave from whichever source and there is no requirement for certain types of leave to be taken in any particular order. Applying the approach in Bear Scotland would, said the Court of Appeal, inevitably increase the chances of creating a break of three months or more between underpayments of holiday pay.
• Fixing an arbitrary reference period for the purposes of calculating holiday pay (12 weeks being commonly used) was incorrect. Instead the reference period should be determined by reference to each claimant and ‘be long enough to be representative of the claimant’s working pattern’ which requires ‘a pragmatic, administration-friendly method for calculating and paying normal pay.’

UK Supreme Court Decision

The PSNI appealed the decision to the Supreme Court and submitted that

• A break of three months or more between the unlawful deductions should ‘break’ the series, as established in Bear Scotland.
• Holiday should be taken in sequence, with 20 days WTD leave taken from an employee’s holiday allowance first, followed by 8 days of domestic leave and finally any additional contractual leave.

The Supreme Court unanimously upheld the decision of the Court of Appeal in that PSNI officers were entitled to claim in respect of a series of deductions and therefore can also claim in respect of underpayment of their holiday pay, going all the way back to 1998.

The judgment noted that the EU principle of equivalence is infringed by the inability of claimants under the WTRs to benefit from the Series Extension (provides protection against the operation of the short limitation period for a worker who suffers repeated deductions from their wages such that they are paid too little on a series of occasions) available to claimants under the Employment Rights Order (NI) 1996. Crucially, the Supreme Court held that the Court of Appeal was right to find that each unlawful underpayment was linked by the common fault that holiday pay had been calculated by reference to basic pay only. A series does not require a contiguous sequence of deductions and a gap of more than three months between deductions does not necessarily bring a series to an end.

The Supreme Court’s decision has now brought the rest of the UK into line with this judgment. This means that gaps of more than three months will no longer prevent individuals bringing claims for a series of underpaid holidays.

The PSNI will now have to honour around £40 million in back pay and other employers face the prospect of significant compensation claims for holiday pay miscalculations.  Therefore, the ruling is of major significance and has the potential to cost employers millions of pounds. However, the legal framework is different in England, Wales and Scotland because the government introduced legislation to limit how far back individuals can bring unlawful deduction from wages claims, to two years. No such legislation exists in Northern Ireland.  Naturally, employers will be concerned. Although the decision offers clarity on an issue that many organisations have been concerned about, employers will not be able to use technical arguments to limit their liability for underpaid holiday pay claims.

It will still be necessary to establish that there has been a ‘series’ of deductions (which will depend on whether they are sufficiently similar) but this decision potentially opens the way for significant claims for underpayments over a two-year period. It underscores the importance of getting the calculation of holiday pay right, including understanding what constituent elements of ‘pay’ need to be included in the calculation.

Holiday pay calculation is a complex issue, not helped by the myriad of case law that has emerged in recent years. While the Supreme Court’s decision brings clarification, there is a substantial amount of information for employers to digest. If you are concerned about the impact of the Supreme Court’s judgment and/or need further advice related to matters arising from this case, please do get in touch with Jan Cunningham, David Mitchell or Sarah Livingstone in our Employment Team.