Historic Underpayments of Holiday Pay
The latest twist in the ongoing saga of holiday pay has been delivered by the Supreme Court. In Chief Constable of the Police Service of Northern Ireland v Agnew the court has held that a gap of more than three months between underpayments in relation to holiday pay does not automatically break a series of deductions for the purposes of claiming back pay arrears.
The principle that a three-month break in a series of deductions would prevent a claimant from claiming for arrears in the period prior to the break in deductions was established by the Employment Appeal Tribunal in Bear Scotland. It had previously provided a useful mechanism for employers to limit the scope of the liability for holiday pay claims. Following this decision, that principle is no longer necessarily applicable.
Over 3,000 police officers and civilian staff working for the PSNI lodged unlawful deductions from wages claims. The claims were in respect of holiday pay having been paid basic pay only while on annual leave, sums earned through overtime and certain allowances were not taken into account. The claims sought arrears of holiday pay going back to November 1998. Following the now well-established body of case law determining what is ‘normal remuneration’ for the purposes of holiday pay, it was accepted that there had been an underpayment and that holiday pay should have been calculated to include periods of compulsory overtime. However, the Respondent argued that the claims could not recover underpayments dating back to 1998 because regulations restricted recovery to sums underpaid in the three months before the claim was brought. The case involved consideration of the Employment Rights (Northern Ireland) Order 1996 and the Working Time Regulations (Northern Ireland) 2016. Of more general application however, was the consideration of what amounted to a series of deductions and when an interval between deductions can break that series.
The Supreme Court determined that 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. All relevant circumstances must be taken into account, including the deductions’ similarities and differences, their frequency, size and impact, how they came to be made and applied, and what links them together. Most importantly the court determined that a contiguous sequence of deductions is not a requirement if each unlawful payment is deemed to have been linked by a common issue, in this case it was that holiday pay had been calculated by reference to basic pay only having failed to take into account overtime payments and allowances. The series of underpayments was not therefore broken by an interval in excess of three months or by a correct payment (i.e. because there was no overtime or allowances payable).
What is the impact of this decision for employers?
The Supreme Court’s decision means that employers will no longer necessarily be able to limit their liability in respect of back pay for holiday pay claims where there has been a break in a series of deductions of more than three months or a correct payment if that payment is based on basic pay only.
The impact of this decision is still mitigated by the two-year backstop on holiday pay claims brought after 1 July 2015 under the Deduction from Wages (Limitation) Regulations 2014.
If you have any queries arising from this update, please contact our Employment team.