Supreme Court decision on holiday pay – the high cost of historic miscalculation

Background

The Claimants in Agnew were a group of police officers and civilian staff from the Police Service of Northern Ireland ("PSNI"). They brought a claim to recover sums, including overtime and various allowances, that they alleged should have been paid as part of their holiday pay since November 1998.

In previous cases, the courts interpreted the law on annual leave taken pursuant to the EU Working Time Directive (which provides for four weeks of leave) to require employers to pay employees their "normal pay" which would include for example, regular overtime and allowances.

In Agnew, it was accepted by PSNI that they had failed to account for overtime and various allowances when calculating the Claimants' holiday pay. The main issue in dispute was how far back in time their holiday claims could go, and whether a three-month gap in the series of underpayments broke the chain of the series of deductions.

The Supreme Court judgment

Whilst the Working Time Regulations (Northern Ireland) 2016 provide that an individual can only claim for events in respect of the three months prior to the date of claim, separate legislation in Northern Ireland (the Employment Rights (Northern Ireland) Order 1996 ) enables claimants to bring historic claims (on the basis they amount to unauthorised deductions from wages), provided they can prove any miscalculated holiday pay constitutes "a series of deductions or payments". To make use of the extension, claimants must bring a claim within three months of the last deduction; the entire series of prior deductions is then considered to be in time.

The Supreme Court considered the operation of the "series" extension. Previously in the case of Bear Scotland Ltd v Fulton [2015] ICR 221 (EAT) ("Bear Scotland") it had been decided that "a series" would cease to exist in the event three or more months passed between any two deductions in wages (regardless of whether the more recent payment/deduction was characterised as having similar features such that it could have formed part of the earlier series).

Essentially, any gap of three months broke the chain in a series of deductions and would result in a claim being extinguished.

In Agnew, the Supreme Court found that the judge in Bear Scotland had incorrectly interpreted the meaning of "a series". Instead, in summary, it held that:

• "a series" would not be broken if, from time to time, the interval between two factually linked deductions was more than three months;
• that the occasional payment of the correct amount (where an employee worked no overtime during the relevant period) would not break the chain provided the correct payment came about by the application of the common fault (i.e failing to factor in overtime at other times); and
• in identifying "a series", that it was "a question of fact, and in answering that question 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."

The Supreme Court further confirmed that there is no requirement that annual leave derived from different sources of law (i.e. the 4 weeks' leave derived from EU law and the 1.6 weeks' derived from the Working Time Regulations (Northern Ireland) 2016) be taken in any particular order and that where it is impracticable to distinguish between different types of leave, all the leave to which the worker is entitled must form part of a single, composite pot.

What does this mean for employers?

Incorrectly calculating holiday pay by failing to account for overtime, commission, allowances etc, can have costly implications for employers.

Employers in Great Britain will be relieved that whilst this judgment does mean potentially higher liabilities, their exposure is limited by a two year back-stop, by virtue of specific legislation introduced by regulations in 2014 which imposes a two-year limit on unlawful deductions claims. There is no equivalent legislation in Northern Ireland, which means that claimants in Northern Ireland can potentially extend their claims back as far as 1998. In the present case of Agnew, it has been estimated that this decision equates to a bill of approximately £30 million for PSNI.

It is important to note that the judgment is not limited to holiday pay claims. Indeed, the "series" extension applies to all wage deductions including overtime payments, bonuses, bank holiday pay and to unlawful deductions applied to wages on account of cash shortages or stock deficiencies. As the judgment also removes the ability to avoid liability for historic deductions by having a three-month gap between incorrect payments, it is vital employers make sure all payments to employees are calculated correctly.

Finally, the Supreme Court's decision to treat all holiday pay as "a single, composite pot" means that unless employers clearly separate leave by reference to the amounts afforded by the Working Time Directive, domestic law and contractual provisions, employers must calculate all leave in the same manner and therefore include amounts for overtime, commission, allowances, etc.

Next steps

• Employers that provide overtime, commission and other similar additional payments should complete a review of their holiday pay calculations and ensure that they factor in these additions on top of the basic salary. Employers should also check that any other payments made to employees do not have any inadvertent miscalculations that could lead to an employee identifying a "series" of underpayments.
• Review how holiday pay has been calculated historically and whether there is a potential liability for unlawful deduction of wages claim.
• If there are any M&A deals on the horizon, the underpayment of holiday pay may be a significant liability that needs to be accounted for or covered off in the documentation.
• As employees must still commence claims within three months of the last deduction, by paying the correct amount as soon as possible, it starts the clock running and reduces the risk of exposure to claims for historic miscalculation.

If you have any questions on this topic or any other employment law matter please contact Paul Reeves, Leanne Raven or your usual Stephenson Harwood contact.