The Supreme Court handed down its judgment this week in the long awaited case of Chief Constable of Police Service of Northern Ireland v Agnew which is the latest development in the law regarding holiday pay and unlawful deductions from wages.

Background

Since the Employment Appeal Tribunal (EAT) decision in Bear Scotland Ltd v Fulton in 2015, an important concern for employers has been claims from workers in respect of holiday pay for historical underpayments as a series of unlawful deductions.

Unlawful deductions from wages claims must be made within three months from the date of the deduction, or from the last in a series of deductions. However, “series of deductions” is undefined in the legislation.

The EAT in Bear Scotland ruled that where there is a gap between the alleged unlawful deductions of more than three months, the deductions cannot be said to form part of the same series and therefore it is only deductions after the gap which form part of the claim. This decision was welcomed by employers in limiting potential liability. 

Agnew judgment

In Agnew, the claimants were police officers and staff in Northern Ireland. For a number of years, Police Service Northern Ireland (PSNI) calculated holiday pay based on basic salary only. As case law has developed over the years, it has been confirmed that other payments which make up “normal” pay, for example regularly worked overtime, should also be included in the calculation of holiday pay.

PSNI accepted there was an underpayment because it had only used basic pay but the central point of the case was regarding back pay in respect of those underpayments and what constitutes a series of deductions.

It should be noted that the Deduction from Wages (Limitation) Regulations 2014, which apply in England, Wales and Scotland and introduced a two year backstop for deductions claims, do not apply to Northern Ireland.

The Supreme Court found for the workers and the following points should be noted:

1. All workers (which for these purposes includes police officers) can bring claims for compensation where they have been paid incorrect holiday pay over a period of time. The principle that a worker can claim for a ‘series of deductions’ to pay applies equally in relation to holiday pay claims in the same way that it does to wages.
   
   This is not a new development in law, but the argument made by PSNI in this case that it would not apply to police officers failed due to ‘equivalence’ principles derived from EU law. 
2. What constitutes a ‘series of deductions’ is a question of fact, and there is no legal principle that a gap three months or more will break a series of deductions. This is a significant development of the law in England, Scotland and Wales and overturns the principle from Bear Scotland.
3. There is no general principle that a worker is deemed to take their statutory holiday before they take any additional or enhanced annual leave within the leave year. The judgment did not go into detail on this point, but employers may elect to differentiate in a contract or policy between types of annual leave as regards carry over, for example.

What does this mean for you?

The Supreme Court’s judgment definitively clarifies these issues for all of the UK nations’ employers, overturning the three month gap principle which means that claims for underpayment of annual leave have the potential to become higher in value. However, in England, Wales and Scotland, the impact of this judgment is limited by the Deduction from Wages (Limitation) Regulations 2014, which means that claims can only go back two years in any event.

Employers must still be aware of breach of contract claim in relation to underpaid annual leave the limitation period is six years from the date of the breach.

How Capsticks can help

If you are an employer who has continued to calculate and pay holiday pay based on workers’ basic pay only, we recommend that you conduct an audit to establish potential liabilities. Capsticks has been supporting employers in relation addressing issues surrounding holiday pay.

If you require assistance with this issue, please contact Nicola Green, Paul McFarlane or Alessandra Gettins.