Supreme Court decision in Agnew: how far back can holiday pay claims go?

The Supreme Court has issued its much-anticipated decision in the case of Chief Constable of the Police Service of Northern Ireland v Agnew, finding that a gap of more than three months between underpayments does not automatically break a series of deductions. This significantly increases the potential liability for back pay if employers have calculated holiday pay incorrectly.

Holiday pay entitlement

Workers are entitled to 5.6 weeks paid holiday under the Working Time Regulations 1998 (WTR). This is made up of 4 weeks' holiday under the European Working Time Directive (known as 'Euro leave') and an additional 1.6 weeks' holiday under domestic law.

Workers with normal working hours should receive their 'normal pay' for the 4 weeks' Euro leave (including for example any regular overtime and commission) and basic pay for the remaining 1.6 weeks. Workers with no normal working hours have their holiday pay for the full 5.6 weeks calculated as an average of all sums earned in the previous 52 weeks including supplementary payments.

Holiday pay claims

Holiday pay claims can either be brought under:

• the Working Time Regulations, in which case they must be brought within three months of the payment or deduction (or termination of employment); or
• the Employment Rights Act (or equivalent Northern Irish legislation), which allows unlawful deduction from wages claims to be brought within three months of the last in a series of deductions.

In Bear Scotland v Fulton, the Employment Appeal Tribunal decided that deductions could only be linked in a series if there was a gap of three months or less between each deduction.

The facts

The claimants were police officers and civilian staff working for the police service of Northern Ireland. They brought claims for underpayment of holiday pay after having received basic pay only during periods of annual leave since 1998. They argued that they should have been paid 'normal pay' - including regular overtime and certain allowances - during the 4 weeks' annual Euro leave entitlement.

The employer accepted that the claimants had been underpaid but the issue before the Supreme Court was how far back the holiday pay claims could go and, specifically, whether the underpayments were broken by a gap of more than three months in the series of deductions.

The Supreme Court decision

The Supreme Court, noting that the aim of the legislation is to protect vulnerable workers from being paid too little for the work that they do, dismissed the appeal and decided that:

• A series of deductions is not automatically broken just because there was an interval of more than three months between deductions. This overrules the decision in Bear Scotland, increasing the ability of workers to claim holiday pay going back over a number of years.

• Whether there is a series of deductions is a question of fact and “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”. In this case, the series was linked by the “common fault or unifying or central vice” of paying basic pay only.

• A series of deductions is not necessarily broken by a lawful payment. So for example, if all the payments in a series were calculated by reference to basic pay only, the fact that on one occasion the correct amount was paid (as there was no overtime or allowances in the applicable reference period) would not be enough to break the series. 

• The appropriate reference period for calculating holiday pay for workers with normal working hours is a matter of fact. The parties had agreed a 12-month reference period here, and this is often adopted given the 52-week statutory reference period for atypical workers, but the Supreme Court indicated that this will not always be appropriate.

• "If and in so far as it is not practicable to distinguish between different types of leave" then all the leave to which a worker is entitled - whether Euro leave, 1.6 weeks' statutory leave or additional contractual leave - must form part of a single composite pot and need not be taken in a particular order. This doesn't sit well in practice with the fact that currently there are different rules for different types of leave in relation to pay rates (although see the recent government consultation) and carry over. The Supreme Court didn't consider what happens when it is practicable to make a distinction, so that it seems that employers who do distinguish between the different types of leave may still be able to do so.

Impact on employers

Many employers changed their holiday pay calculations after European case law made it clear that workers with normal working hours are entitled to receive their 'normal pay' rather than just 'basic pay' for the 4 weeks' Euro leave. However, for those who have not done so or who are currently involved in holiday pay litigation (which may have been sisted/stayed pending this decision), the Supreme Court's ruling potentially has significant repercussions.

Although it will still be necessary to establish that there has been a series of deductions (which will depend on whether they are sufficiently similar i.e. have a common fault), gaps of more than three months will no longer automatically prevent claims for a series of underpaid holidays. It will be easier to bring holiday pay claims based on a series of deductions: where a worker has been underpaid holiday an employment tribunal is likely to find that each time they took annual leave and were underpaid formed part of a series of deductions until there is a break in the chain (e.g. when their holiday pay starts to be correctly calculated).

The impact in Great Britain is mitigated by a two-year backstop on holiday pay claims brought on or after 1 July 2015. There is however no equivalent provision in Northern Ireland, where employers could face claims going back to the later of 1998, when the WTR were introduced, or the date the employee started employment.

The Supreme Court's decision highlights the importance of calculating holiday pay correctly and understanding what elements of pay need to be included for each worker. Please get in touch with Brodies Employment and Immigration team if you would like advice on holiday pay calculations or dealing with claims. Workbox by Brodies users can access FAQs at the page on Holiday Pay.