Holiday pay: Supreme Court decision increases financial exposure for employers  

In Chief Constable of the Police Service of Northern Ireland v Agnew, an appeal against a decision of the Northern Ireland Court of Appeal, the Supreme Court confirmed that a gap of three months between underpayments will not always break a ‘series of deductions’ for the purposes of a claim (potentially allowing employees to make claims stretching much further back in time).

Crucially, in this respect, today’s Supreme Court decision overrules that of the Employment Appeal Tribunal (EAT) in the high profile holiday pay case Bear Scotland v Fulton, which has informed holiday pay strategy for employers in Great Britain since 2015.

The facts  

This claim was brought by approximately 3,700 police staff, falling into two groups. The first group of claimants were police constables or sergeants in the PSNI. The second group of claimants were civilian employees engaged in a variety of roles by the police authority. The Northern Irish Industrial Tribunal (IT), which is Northern Ireland’s equivalent of the first instance employment tribunal, held that that overtime payments (and in the case of the civilian employees, certain allowances) should be included in the calculation of ‘normal pay’ for the purposes of their annual leave entitlement.

In the NI Court of Appeal

The Court of Appeal in Northern Ireland upheld this decision.

On the question of how far back employees should be allowed to claim, the NI Court of Appeal emphatically chose not to follow the earlier decision of the EAT in Bear Scotland, (which had held that any series of deductions is automatically broken by a gap of three months).

Neither will a series of deductions be automatically broken, the NI Court of Appeal stated, by a ‘compliant’ holiday pay calculation (or a calculation in respect of which there is no tribunal complaint).

The Supreme Court decision

The Supreme Court has upheld the decision of the NI Court of Appeal on both these issues, and unanimously rejected the appeal brought by PSNI.

Considering the ‘three-month rule’, the Supreme Court observed that, in general, a claim for unpaid wages must be brought within three months of the relevant act or failure to act.

However, legislation provides an exception to this, allowing a claim to brought within three months of the latest in a ‘series’ of deductions (s55(3) Employment Rights Order 1996 in Northern Ireland/s23(3) Employment Rights Acts 1996 in Great Britain). The Court held that the purpose of this exception is to protect employees, some of whom may be vulnerable, against the short three-month time limit where they suffer repeated deductions from their wages.

The notion that a three-month gap between deductions will ‘automatically’ break the series, runs contrary to this purpose, and might produce unfair consequences. Indeed, it might create scope for a ‘canny operator to game the system’ by spacing out non-compliant payments.

The Supreme Court also noted that requiring an employee to bring a new claim every three months, rather than a single claim in respect of the whole series of deductions, would ‘impose a wholly unnecessary burden on the employee, for whom each individual deduction is relatively small, but where the aggregate is substantial’.

The existence of a series of deductions, and whether the series is broken, must be judged on an individual case by case basis. All relevant information should be taken into account, including the frequency, size and impact of the deductions; their similarities and differences; what links them together; how they came to made and applied; and all other relevant circumstances.

The Supreme Court also endorsed the Court of Appeal’s view that a lawful payment by the employer will not necessarily break a series of deductions (unless this is suggested by the facts and circumstances of the case).

Which leave comes first?

The requirement that employees should receive ‘normal remuneration’ in respect of holiday pay applies only to the first 20 days leave afforded by the EU Working Time Directive.

In Bear Scotland, the EAT proposed that the 20 days leave available under the Working Time Directive comes first in any leave year, followed by ‘additional’ leave under the Working Time Regulations 1998, lastly followed by any further leave available under the contract of employment or conditions of service.

In this case the NI Court of Appeal, and now the Supreme Court, held that all of these types of leave are indistinguishable from each other. This makes it much more difficult in practice to establish a three month gap in any series of deductions.

Of course, this point is less significant in light of the Supreme Court’s finding that a three month gap will not necessarily break a series of deductions in any event.

What does this mean for me?

The direct impact of the Court of Appeal decision was confined to Northern Ireland, which is of course a separate legal jurisdiction. While the judgement had considerable persuasive value, employment tribunals and higher courts in other parts of the UK were not obliged to follow it. However, this Supreme Court decision is binding across the whole of the UK and must be followed by courts in England, Wales and Scotland as well as Northern Ireland.

The Supreme Court acknowledged that while the sums involved for each Claimant in this case were relatively small, the outcome has ‘a bearing on thousands of claims each year’ and ‘a cumulative impact which is very significant indeed’.

This decision potentially makes it easier for employees to make holiday pay claims stretching much further back in time. Employees whose holiday pay fails to take account of regular overtime, and whose holiday was taken and/or paid at intervals of more than three months, will now be able to argue that a series of unlawful deductions has been made (subject to the facts and circumstances of the case).

Additionally, it is no longer open to employers to argue that all EU-derived leave is taken first, and that a series of deductions is broken by ‘additional’ WTR leave or additional contractual leave, falling at the end of the holiday year.

However, it is important to note that the Deduction from Wages (Limitation) Regulations 2014, which do not apply in Northern Ireland, impose an additional two year back stop on holiday pay claims (and claims for many other types of deductions from wages) in the rest of the UK. While some commentators have suggested that these Regulations may be subject to legal challenge, no such action has yet been instigated and the position is unlikely to change in the near future.

In Northern Ireland, the impact of the Supreme Court decision is more concerning for employers as, in the absence of a two year back stop, employees may conceivably bring claims for unpaid holiday stretching back 25 years, to the implementation of the relevant legislation.