Concept for Important New Holiday Pay Case – Employers at risk of historic holiday pay claims

Workers’ rights to bring claims of historic underpayments of holiday pay have been significantly increased by the recent case law decision of the Supreme Court in the case of Chief Constable of the Police Service of Northern Ireland v Agnew.

Can employees claim for historic underpayments of holiday pay?

It has now been clearly confirmed that employees may be able to claim for historic underpayments for holiday pay even if there are gaps of more than three months between the deductions or a correct payment is made. Before this much anticipated case law decision by the Supreme Court it was thought that a gap of more than three months would defeat claims for historic holiday pay and so this would be an effective cut-off point for many such claims.

Recent law on statutory holiday pay

It is not uncommon for employers to incorrectly calculate holiday pay. The case law and legislation on holiday are complex, have regularly changed over time, so often it has been challenging for employers to keep up.

Holiday pay case law has developed in support of the underlying health and safety purpose of the original EU legislation (the Working Time Directive), which the UK implemented by way of the Working Time Regulations 1998 (WTRs). This is that the requirement to provide workers with paid annual leave is a health and safety measure to ensure that workers take a break from work. Staff should not be discouraged from taking holiday and therefore holiday pay should not be less than the pay they would have received when at work. This has meant case law has developed to confirm that regular, variable payments that some workers receive as their normal remuneration such as overtime, commission, and shift rates should be taken into account in the calculation of holiday pay for at least four weeks out of 5.6 weeks of statutory holiday entitlement. This is the proportion of holiday entitlement that is from the European Working Time Directive. This does not affect the additional UK 1.6 weeks of statutory leave, which adds up to a total of 28 days of statutory annual leave per annum for full time workers. Although, many employers treat both types of annual leave the same often because it would be an administrative burden to separate it out.

Employers will sometimes not factor in variable payments such as overtime correctly into the calculation of holiday pay. This is what happened in the recent Agnew case.

The facts

More than 3,300 police officers and 364 civilian employees brought claims for underpaid holiday pay against the Police Service of Northern Ireland and the Northern Ireland Policing Board. The claims stretched back to November 1998. The claimants had historically only received basic pay when they had taken periods of holiday from work. The employer and workers bringing the claims agreed that there had been an underpayment and in fact the holiday pay should have factored in periods of compulsory overtime and certain allowances for the four weeks of their annual leave provided by the European Working Time Directive.

Supreme Court decision

The Supreme Court was required to decide how far back the Claimants could go with their holiday pay claim. Under the relevant legislation in Northern Ireland (which reflects the Employment Rights Act 1996 applying in England) the claims could only include payments made in the three months before the claims were brought. This is unless the underpayment was part of a series of deductions that could be linked together as long as the claim was brought within three months of the last of that series of deductions.

Previously it had been thought following the earlier Employment Appeal Tribunal’s decision in the case of Bear Scotland v Fulton that a series of deductions of underpayments could only be linked for the purpose of a claim if there was a gap of three months or less between each deduction. The Supreme Court has now held otherwise in the Agnew case and definitively confirmed that where there is a series of deductions of pay and these are all factually linked on the basis of an employer not fulfilling its obligations to pay the correct amount of holiday pay, then the series of deductions should not be limited by a gap of more than three months between them as per the previous Bear Scotland case decision. In the Agnew case this has led to a claims for underpaid holiday valued in the region of £30 to £40 million.

A point remaining in favour of employers in Great Britain (for the time being) is that the effects of this judgment are limited for employers by the current limitation period for unlawful deduction from wages claims under the Employment Rights Act 1996. There is a backstop date of a maximum of two years, although this principle is vulnerable to challenge and may be overturned in the future.

It is worth noting that where holiday pay has been unpaid rather than underpaid, the former type of holiday pay claim can be carry over indefinitely and will not be limited by the statutory two year backstop date. For example, this can occur where an employer has not properly recognised a member of staff as a worker (or employee) and has instead incorrectly treated them as a self-employed consultant or contractor who does not have statutory paid holiday rights. See our previous article on the Pimlico Plumber case on this point.

What should employers do now?

Employers who have been underpaying holiday pay are now exposed to a greater liability as a consequence of the Agnew case. The following steps can be taken to manage the risk of potential claims:

  • Carry out a review of how holiday pay has been calculated in the organisation, it is important to understand if you have been doing this correctly or not. If not, then identify this and assess if your organisation is within the parameters of potential holiday pay claims.
  • Make sure that holiday pay is being paid correctly going forwards and that it reflects the normal remuneration a worker would receive when they are at work. Although the Supreme Court established that more than three months between underpayments of holiday pay does not stop them being part of a series of unlawful deductions, a claim would still need to be made within three months of the last deduction. So, this means the sooner you correctly pay holiday pay the sooner the scope for a worker to bring a claim will expire.

It is important to correctly calculate holiday pay, both during employment and on termination of employment, otherwise an employer risks facing employment claims. The Employment team at Stephens Scown LLP is well placed to help with such matters.