16th October, 2023

Handling Historic Holiday Pay - Insights from Agnew

Rachael Levene considers the Supreme Court's long-awaited and much-anticipated decision, Chief Constable of the Police Service of Northern Ireland v Agnew.

Background to Agnew

A group action was brought by police officers and civilian employees against the Police Service of Northern Ireland and Northern Ireland Policing Board based on the calculation of holiday pay by reference to basic salary only, and without reference to overtime and other allowances.

Based on case law, the 4 weeks of annual leave derived from the EU Working Time Directive (WTD) should have been based on ‘normal pay’, and so included overtime and such allowances. Claims for unlawful deductions and underpayment of holiday pay were brought under the Employment Rights (NI) Order 1996 (the Northern Irish equivalent of the Employment Rights Act) and Working Time Regulations 1998 (WTR) respectively. The key issue was how far back in time their claims could go; were historic claims for underpayments broken by a 3-month gap in deductions?

At first instance, the claims were upheld and allowed to go back to 1998. The Court of Appeal dismissed the appeal. So did the Supreme Court and its decision is binding throughout the UK.

Agnew has provided some clarity and led to further discussion for those dealing with holiday pay claims.

Holiday Pay 101

It is helpful to remember a few established legal points.

The basic right to annual leave under the WTR 1998 comprises the right to 4 weeks’ leave under the WTD. This is transposed into national law by Regulation 13(1) of the WTR 1998. The additional right to 1.6 weeks’ leave is a domestic right, based on 8 public holidays in England and Wales each year (although there is no need to use leave on those dates). This is often referred to as ‘additional leave’ or ‘WTR leave’.

Holiday pay for the 4 weeks’ leave under the WTD should be based on ‘normal pay’. This includes payments such as overtime, commission and performance bonuses (following the ECJ’s decision in Williams v British Airways PLC in 2011 and later case law).

Pay for WTR leave (1.6 weeks) and contractual leave (if applicable) does not include these additional payments.

Workers can bring claims for unlawful deduction from wages under the ERA 1996 in respect of holiday pay underpayments. This can cover multiple underpayments if they form a ‘series’ of deductions. The claim must be brought within 3 months of the last deduction.

In Bear Scotland v Fulton (2014) the EAT stated that a gap of 3 months or more would break a ‘series’ of deductions. This meant that the claim would not survive past such a break.

Claims for underpayments for holiday pay can also be made under the WTR. However, the claim must be brought within 3 months of the underpayment falling due, so it is not possible to claim a series of underpayments.

What is a ‘series’?

In Agnew the Supreme Court has clarified that a break in a 3-month period does not necessarily break a chain of deductions. The key question was what was meant by ‘a series’.

The Supreme Court held that the aim of the legislation was to protect workers and that there was no definition of the word ‘series.’ Agreeing with the NI Court of Appeal, the Supreme Court gave the work its ordinary meaning. In this context, it meant a number of things that followed each other in time.

The following matters were important: the deductions in issue, their similarities and differences, the size of deductions, how deductions were applied, their frequency, and any other relevant circumstances.

Whether a ‘series’ exists, therefore becomes a fact-sensitive question in each case.

In Agnew, the unlawful deductions were factually linked together by the fact that there was a ‘common fault or unifying central vice’ of the employer paying holiday pay based on basic pay.

It is also significant that a lawful holiday payment (because no overtime was worked so the holiday pay should only have been for basic pay) between two unlawful payments did not break the series. This was because the lawful payment was still based on the ‘common fault or unifying central vice’ of the calculation of holiday pay being based on basic pay only.

What order are types of leave taken in?

Since different types of leave are derived from different sources – EU entitlements (4 weeks), statutory entitlements (1.6 weeks), and additional entitlements under contract (check the contract!) – the question has been whether different leave entitlements should be regarded as being taken in a particular order? The message from the Bear Scotland case had been that WTD leave would be taken first, followed by statutory leave, and lastly any contractual leave.

In Agnew, the Supreme Court, upholding the Court of Appeal’s decision, clarified that there is no need for leave to be taken in a particular order. It was confirmed that all leave forms part of a single, composite ‘pot’ unless it is practicable to distinguish between different types of leave.

Of less practical assistance to practitioners, the judgment did not address how to draw this distinction between different types of leave.

It remains to be seen whether claims will be brought against employers on the basis that all leave is part of a composite whole, so their WTR and contractual rates ought to be in line with higher WTD leave rates.

It is arguable that employers who pay normal pay for 4 weeks’ WTD leave and a lower rate for the remaining leave periods are complying with their obligations. In such cases, especially where there is clear and cogent evidence to back up this process, it could be said that it is practicable to distinguish between the different types of leave.

Concluding Remarks

Exposure to such claims is capped in Great Britain owing to the Deduction from Wages (Limitation) Regulations 2014 which limits unlawful deductions claims to 2 years. However, the message is clear: there is now a greater potential liability for employers who have been underpaying holiday pay, since workers can claim a series of underpayments even where there is a gap of more than 3 months between deductions, and even where correct payments might have been made between those deductions.

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