Breaking: Supreme Court demolishes technical legal arguments which employers have relied on to limit holiday pay liabilities

The Supreme Court in Chief Constable of the Police Service of NI and others v Agnew has ruled that employers can't defeat holiday pay claims brought as a series of deductions even if two underpayments are separated by a gap of more than three months or if a lawful payment is made between them.  

This decision will cause those employers who still aren't including overtime payments, allowances or some commission payments in holiday pay, real concern. It will also impact those employers (predominately in the education sector) who have underpaid staff because they pro-rated the holiday of term-time workers contrary to the Supreme Court's decision in Brazel which it handed down last year.

The law

Workers can bring claims for underpaid holiday in two ways: under regulation 30 of the Working Time Regulations 1998 or as a series of deductions under section 23 of the Employment Rights Act 1996. 

In both cases, the worker has a short three-month window to bring a claim, although the 'trigger point' is different. To bring an unlawful deduction from wages claim, the trigger is the date of the last underpayment. Workers usually prefer to bring unlawful deduction claims because they don't have to bring separate claims each time they are unpaid. Provided they lodge their claim on time, they can include previous deductions as part of a series of underpayments. 

That principle was applied without controversy until 2014 when the EAT handed down its decision in Wood and others v Hertel and Fulton and Bear Scotland Limited which considered whether voluntary overtime and some allowances should be included in holiday pay. 

The Judge took the opportunity to review section 23 (which doesn't define 'series' or explain when a series comes to an end) and laid down principles which severely restricted how far back workers could link underpayments of holiday pay. The Judge drew a distinction between the first 20 days leave (Directive leave) which had to include overtime etc and the remaining eight days (additional WTR leave) which didn't and ruled that gaps between the different 'types' of leave, or gaps more than three months between deductions, broke the link. 

Then, in England, Wales and Scotland, the government introduced legislation which meant workers could only recover underpaid holiday for a maximum of two years.  NI didn't introduce similar legislation. 

Since then, employers have been able to rely on technical legal arguments to limit their liability for underpaid holiday claims - often to the current leave year. This has left many workers out of pocket (until now).

Background to the case

This case was brought on behalf of 3,380 police officers and 264 civilian employees who had only received basic pay during their holidays. At the time the claims were issued (2015/16) the underpayments were estimated to amount to around £30 million. The police argued they were entitled to apply the EAT's reasoning in Bear Scotland and exclude those payments it could lawfully make at basic pay. Applying this method resulted in underpayments of around £300,000. 

The issue eventually wound up before the NI Court of Appeal which made some very important findings:

1. The EAT's analysis of what amounts to a series of unlawful deductions in Bear Scotland was incorrect and had resulted in 'arbitrary and unfair' results.  A series is not broken by lawful payments, or by a gap in payments of more than three months. 
2. Annual leave is not taken in a particular sequence. The different types of leave (Directive, additional WTR and contractual holiday) are indistinguishable from each other.
3. It is wrong in principle to use 365 days as a divisor to calculate holiday pay as it includes both working and non-working days. 

That judgment was not binding outside of Northern Ireland and other UK employers could still legitimately rely on Bear Scotland to limit their holiday pay liabilities. The employer appealed and the UK Supreme Court has now reached a decision which applies to all UK employers.

Decision

The Supreme Court agreed with the NI Court of Appeal and has overturned this aspect of the Bear Scotland judgment. 

It made the point that parliament introduced section 23 to 'provide a measure of protection against the operation of short limitation periods for a worker who suffers repeated deductions from their wages with the consequence that they are paid too little, not just on one occasion, but on a series of occasions'. It was designed to protect workers (particularly vulnerable ones) from being exploited. 

Imposing additional restrictions, such as a mandatory three month cut off between deductions, could produce 'unfair consequences' and would allow 'canny' employers 'game the system' by spacing out holiday payments. The only way workers would be able to preserve their position would be to issue new claims which 'made no sense at all' and would 'impose a wholly unnecessary burden on the employee for whom each individual deduction is relatively small, but where the aggregate is substantial'.

It concluded that there is no need for workers to demonstrate that underpayments form a continuous sequence, or that all underpayments have to be made within three months of each other.

Does this mean that workers will be able to successfully link underpayment of holiday as a series of unlawful deductions?

The Supreme Court said that will depend on the facts, but the following will be relevant: the similarities or differences between deductions, how often they are made, the amount deducted and the impact of that, why the deductions have been made and what links them together. 

In this case the common fault was the incorrect calculation of holiday pay (which was paid at a basic rate of pay). Although the reasons why holiday pay has been underpaid may differ from employer to employer, workers are likely to be able to point to a 'common fault' in other cases. 

What they won't be able to do though is link other deductions (such as sick pay deductions or underpaid bonus payments) with holiday pay claims. The character of the deduction has to derive from the same source in my view. 

In England, Wales and Scotland, workers will only be able to recover underpaid holiday for a maximum of two years. In Northern Ireland claims can go back to 1998 for long-standing employees. 

Are the different components which make up annual leave taken in a particular order?

No. The Supreme Court said that there is no basis under the WTR's to suggest that a worker takes Direction leave first, followed by additional WTR leave and any other contractual leave. Leave forms one single, composite pot. That distinction becomes less relevant now, in any event, as employers won't be able to distinguish between the different types of leave to reduce their liabilities.

Employers will be able to continue to distinguish leave by contract and may wish to do so if they only pay holiday pay at the worker's normal rate for four weeks and reduce it to basic pay for the remainder. 

Can employers use 1/365 to determine a day's holiday pay?

No, the Supreme Court said it was wrong in principle to use this divisor. Employers should use working days. 

Implications for UK employers

It's extremely important to properly calculate the holiday pay of your staff (and the amount of holiday they are entitled to) to avoid being sued. You need to understand what has to be included in the calculation and what you can legitimately ignore. Even though we have a number of binding judgments which address elements of pay such as voluntary overtime and allowances linked to work - there are still ambiguities - particularly around the concept of 'regular'. The issue of whether to include commission and bonuses is particularly complex and you may need to take legal advice to ensure that you are getting this right. We're experts in holiday pay claims and can help you with this. 

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