Landmark ruling by the Supreme Court regarding underpayments of holiday pay

After success for the police officers and civilian employees in the Industrial Tribunal (“IT”) in Northern Ireland, in 2018 and the Court of Appeal of Northern Ireland (“NICA”), in 2019, the long-awaited judgment of the Supreme Court confirms the significant implications for employers regarding underpaid holiday pay.

With the Supreme Court dismissing the PSNI’s appeal, there is now clarity in a number of key areas relating to the calculation of holiday pay.

The Supreme Court held that for an unlawful deductions claim, neither a gap of three months or more between underpayments of holiday pay nor a lawful payment of holiday pay can be relied on to argue that a chain of a series of deductions is broken.

We consider the background and recent judgment of the Supreme Court in Chief Constable of the Police Service of Northern Ireland and another v Agnew and others (Northern Ireland) in further detail below.

Background

Industrial Tribunal claims were lodged 2015 by police officers and civilian employees of the PSNI in relation to holiday pay that did not include consideration of overtime and various other allowances. This meant that they were only paid their basic pay as holiday pay even though they regularly worked overtime. The claims were brought under the Employments Rights (Northern Ireland) Order 1996 (“ERO”) and the Working Time Regulations (Northern Ireland) 2016 and 2018 (the WTRs). The claimants were seeking arrears of holiday pay backdated to the date WTRs were first introduced, on 23 November 1998.

The PSNI accepted that the police officers and civilian employees were underpaid when they took their holidays. The issue to be determined was how far back their claims for underpayment could go.

By way of explanation, there are two statutory routes for bringing a claim relating to underpaid holiday pay: under the WTRs and the ERO.

A claim brought under the WTRs can only extend back three months from the date of the claim unless the Tribunal is satisfied that it was not reasonably practicable for the claim to be presented within that time.

The option under the ERO however is more favourable to a claimant. The ERO provides protection against unauthorised deductions from wages (which includes holiday pay). It includes a provision relating to a “series of deductions” whereby the three months’ limitation period applies from the last deduction/payment received.

However, whilst the civilian employees were able to bring their claims under the unlawful deduction from wages provisions of the ERO, the PSNI argued that the police officers were not workers in the traditional sense and could therefore not rely on these provisions, and were not able to recover underpayments dating back to 1998. Only underpayments in the three months before the claims were brought could be recovered under the WTRs.

A further problem for the claimants, was the 2016 EAT decision in Bear Scotland v Fulton. Whilst the EAT confirmed that regular overtime should be considered when calculating workers holiday pay, it also ruled that a series of unlawful deductions, including that of holiday pay, would be broken by a gap of three months or more.

Both the IT and the NICA found that, whilst police officers were not workers under the ERO, the EU principle of equivalence should be applied. This required that national remedies for infringement of EU rights must not be less favourable than those available under domestic rights.

As the remedy for breach of EU law rights under the ERO was more beneficial than that of the WTRs, it was read into the WTRs to allow the IT (and subsequently the NICA) to consider the underpayments as being part of a series.

After losing their case at both the IT and NICA, the PSNI appealed to the Supreme Court. After almost 10 months of anticipation, the Supreme Court dismissed the appeal on 4 October 2023. UNISON were an “intervener” in the Supreme Court proceedings and put forward arguments on behalf of the police officers and civilian employees.

Supreme Court decision

The Supreme Court held that the NICA was correct in finding in favour of the police officer claimants on the ground of the EU principle of equivalence. The aim and essential characteristics of the ERO and WTRs were of such similarity that they ought to be regarded as being similar domestic actions.

The Supreme Court then turned to the interpretation of the word “series” in the ERO. It noted that the purpose of the ERO is to protect workers from being underpaid. It held that the word “series” meant a number of things of a kind which follow each other in time. On this basis, whether a claim is to be considered as a series of deductions is essentially a matter of fact: consideration of the circumstances and the deductions’ similarities, frequency, size, reason and impact is needed.

The Supreme Court disapproved the EAT’s decision in Bear Scotland, finding that neither a gap of three months between unlawful deductions nor a lawful payment of holiday pay would break a series of such deductions.

The Supreme Court agreed with the NICA in that each unlawful underpayment was factually linked to its predecessor by “the common fault or unifying or central vice” that the holiday pay had been calculated by reference to basic pay rather than normal pay.

That method of calculation provided a factual link between all payments of holiday pay, both to police officers and civilian employees and did so consistently from 23 November 1998. This constituted a series of deductions even though they were of different amounts and the fact that the time intervals between them varied and sometimes extended to more than three months did not break the series. Significantly, the Supreme Court also held that the series of deductions was not broken by a lawful payment of holiday pay “if the lawful payment came about, as it did from time to time, because the worker concerned was not paid overtime in the reference period and so did not receive any relevant allowance.”

The NICA’s view on other issues consequential to the case were also upheld by the Supreme Court, including that:

• No distinction need be drawn between the minimum annual leave entitlement mandated by EU law (that being 4 weeks), the additional 1.6 weeks’ leave required by domestic law and any additional leave permitted in a worker’s contract of employment. Any and all leave entitled to a worker should be considered as a composite whole; and
• Calculation of holiday pay should be done by using the number of working days in the specific reference period, rather than the number of calendar days in a year. The reference period itself being a question of fact.

The cost of the PSNI’s historic holiday pay claims, if they had won their appeal, was estimated to be around £300,000. Following the Supreme Court’s judgment, this is now calculated to increase to £30 million.

What does this mean for employers?

A crucial point to make is that the Deduction from Wages (Limitation) Regulations 2014 impose a statutory two-year backstop for holiday pay claims. This prevents claims going back for many years and provides some relief for employers in England, Wales and Scotland, where the Regulations apply. However, the Supreme Court decision could still be very costly for employers because of its ruling that a series of deductions is not necessarily broken by a gap of three months or a lawful payment.

The Deduction from Wages (Limitation) Regulations 2014 do not apply to Northern Ireland at all so employers within that jurisdiction risk considerable financial exposure if they have not calculated holiday pay correctly.

Whilst most employers are likely to have been calculating holiday pay correctly, or reviewing how it is calculated as the case law has developed over the years, they may want to review this once again in light of the Supreme Court decision to ensure there is no risk of future holiday pay claims.