Employment & Pensions Blog: Exploring the Supreme Court's Landmark Judgment on Holiday Pay

On 4 October 2023, the Supreme Court released its judgment on the long-awaited holiday pay case of Chief Constable of the Police Service of Northern Ireland and another v Agnew and others.

Background

As many will recall, the Northern Ireland Court of Appeal upheld a ruling in 2019 that staff had not received the holiday pay they were entitled to for a number of years which opened a whole host of issues for employers. This followed the Police Service of Northern Ireland (“PSNI”) having calculated holiday pay based on basic pay only without reference to overtime worked by staff and other allowances they were entitled to. However, according to European case law, staff should have been paid their “normal pay” during the 4 weeks annual leave provided by the EU Working Time Directive, which included overtime and other allowances such as certain types of commission payments.

Since then, the case has been making its way through the legal system and having been unsuccessful before the lower Courts, the PSNI appealed to the Supreme Court.

The Recent Supreme Court Judgment

The Supreme Court judgment handed down last week emphasised the preciously adopted position around holiday pay calculations and provided clarity on the rules for recovering historic underpayments of holiday pay. It has been confirmed that Claimants can now bring a claim for unlawful deduction of wages based on a ‘series of deductions’, even where there has been a gap of more than three months between successive underpayments.

The Supreme Court has also summarised the correct approach to determining whether a particular underpayment forms part of a “series of deductions” as follows:

Whether a claim in respect of two or more deductions constitutes a claim in respect of a series of deductions is essentially a question of fact, and in answering the 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.

Whilst the similarity in payments will still be a relevant factor, this is a big depart from the previous precedent set in Bear Scotland Ltd v Fulton, which held that a series of deductions would always be broken if there was a gap of more than three months between successive deductions. Whilst the order in which leave is taken in was of less relevance because of the judgment that a gap of 3 months does not break a series of deductions, the Supreme Court still held that the two elements of leave entitlement (the 4 weeks EU working time directive entitlement and 1.6 additional leave) should be treated as a composite whole, and there was nothing to suggest these are taken in a particular order.

Implications for Employers

This landmark case will undoubtedly generate concern for employers who have not included overtime payments, allowances and certain types of commission payments when calculating holiday pay. Employers now also face greater liability in that workers will be able to claim for deductions regardless of any gap between deductions that are greater than 3 months. We may therefore see an influx of claims on holiday pay being brought on the basis of the miscalculation of holiday pay.

It is important to note however that, in Great Britain, regulations were enacted which imposed a two-year backstop on claims for unlawful deduction of wages for underpayments of holiday pay. Needless to say, this judgment acts as a reminder to ensure all holiday and other forms of pay are accurately calculated from the outset, which will minimise any future claims. For employers still paying basic holiday pay, we would recommend ensuring holiday pay is paid on the basis of normal remuneration going forward as any claims for unlawful deduction of wages must still be brought within 3 months of the last deduction.  This means that by paying staff correctly now, even though this will not now automatically break a series of deductions, it will kickstart the limitation period to bring a claim for historic underpayments.

As mentioned above, the Supreme Court held that annual leave entitlement should be viewed as one composite pot and not used up in a particular order (i.e. the 4 weeks EU leave first) as had been thought in previous case law. This can be problematic because it is only the EU leave for which “normal remuneration” needs to be paid and it will be difficult to know when this falls within someone’s entitlement. Employers may therefore want to take the most straightforward approach which would be to pay normal remuneration for each and every day of holiday, regardless of whether this might be the 4 weeks EU leave, 1.6 “additional leave” or any contractual entitlement on top of this.  This approach is certainly on the horizon in any event given the consultation on holiday pay earlier this year which proposed merging the two statutory leave entitlements.

For further information, please contact a member of the Employment Team.