UK Supreme Court issues judgment in holiday pay case

The issue of holiday pay is one that has been subject to extensive examination by the courts over the last decade. The latest chapter is now written. Today (4 October 2023), the Supreme Court has handed down its decision in the case of Police Service of Northern Ireland (PSNI) v Agnew.

The key issue in this case was how far back employees could claim for underpayments of holiday pay. Could they claim for any underpayments that occurred during the entire period of their employment or would the ability to claim for a series of deductions be limited by any gap of more than three months between deductions? The Supreme Court unanimously decided that the former was the correct approach. Despite this case relating to a piece of Northern Irish legislation, the decision has implications for the rest of the UK due to the equivalent statutory provisions in place.

The decision was not unexpected but does provide confirmation from the highest court in the UK that claims for holiday pay are not limited by a three-month gap between deductions, although for employers in Scotland, England and Wales, there is currently a two-year overall limit on claims (see further below).

Background to the Appeal

The appeal centred on the underpaid holiday pay claims of 3,380 police constables and 364 civilian employees of the PSNI. The employees argued that they had been underpaid for their annual leave, as they had only received their basic pay, despite regularly working overtime. The PSNI accepted that there had been underpayments but contested the timeframe within which the employees could seek recovery.

Previously, in the Employment Appeal Tribunal (EAT) case of Bear Scotland, the EAT concluded that a series of unlawful deductions would be broken by a gap of three months or more between unlawful deductions. However, the Court of Appeal in Northern Ireland concluded that this principle does not correlate with Northern Irish legislation and a series of deductions is not necessarily brought to an end by a gap of three months or more between unlawful deductions.

The Statutory Provisions

The relevant legislation in this case included the Working Time Regulations (Northern Ireland) 1998 and 2016 (WTRs (NI)) and the Employment Rights (Northern Ireland) Order 1996 (ERO).

The PSNI rely on a provision in the WTRs (NI) that would restrict the police officer claimants to recovering sums underpaid in the three months before their claims were brought before the Industrial Tribunal. The police officers relied on an alternative provision in the ERO which would allow them to claim underpayments arising from a series of payments, provided that the last underpayment in the series was not more than three months before the claim was brought before the Industrial Tribunal (“the Series Extension”). Similar provisions apply in the rest of the UK.

The PSNI argued that police officers could not claim under the ERO, as they were not considered employees or workers under this legislation, despite being expressly covered by the WTRs (NI).

The Decision

The Supreme Court found that the Court of Appeal was correct, and that each unlawful underpayment was linked by the common fault that holiday pay had been calculated with reference to basic pay only. Importantly they found that a series did not require an adjoining sequence of deductions and a gap of more than three months between deductions did not necessarily bring a series to an end. A correct payment of holiday pay, even if based on basic pay, did not break the series.

Implications for employers

Due to the formal two-year backstop in place in the rest of the UK (introduced via the Deductions from Wages (Limitation) Regulations 2014), even though the principle that a three-month gap in a series of unlawful deductions will break the chain of deductions is overturned by the Supreme Court, there is a clear limit on how far back workers in England, Scotland and Wales will be able to claim for underpaid holiday pay.

Prior to today’s decision, most commentators acknowledged that the three-month gap rule was unlikely to stand up to scrutiny and should not be relied upon. Others expressed a similar view in respect of the two-year backstop under the 2014 regulations. The potential grounds floated for challenge of the two-year backstop are less persuasive than those levelled at the three-month gap rule but whether or not the two-year backstop is tested in the future remains to be seen. For now, it remains in place.

However, for employees in NI, as there is no backstop, their claims could potentially stretch back to either the commencement of their employment or the commencement of the Working Time Regulations (Northern Ireland) 1998, which is likely to cause significant financial consequences for employers in Northern Ireland.

Holiday Pay – other developments

We had previously updated you on the case of Harpur in our July 2022 e-update. This case related to calculation of holiday pay for those who work part-year or who worked irregular hours and determined that their entitlement could not be pro-rated under the applicable legislation, resulting in a significant (and disproportionate) liability for employers of these staff types. Since we published our update, the UK Government has consulted on the calculation of holiday entitlement received by part-year and irregular hours workers earlier this year and proposals include a reversal of the impact of Harpur to allow pro-rating. The consultation ended in March 2023, however, there is currently no outcome to the consultation and no timeline as to when one can be expected.