On 4th October 2023, the Supreme Court made a landmark ruling relating to holiday pay that many employers should take note of, as it could mean they face greater liability for underpayments of holiday pay.
The issue of how holiday pay should be calculated has always been a bit of a minefield, but the Supreme Court’s ruling in Police Service of Northern Ireland and another v Agnew and others adds an extra layer of complexity which is crucial for employers to get ahead of to avoid costly holiday pay disputes.
The case
The original case was brought by around 3,380 police constables and 364 civilian employees who work for the Police Service of Northern Ireland (PSNI). They claimed the holiday pay they received for annual leave was calculated based only on their basic pay, without considering other factors, like compulsory overtime.
Both sides in this case agreed there was an underpayment issue, but disagreed on how far back in time the claims for underpayment should go.
The case was eventually brought before the NI Court of Appeal which found:
A series isn’t interrupted by lawful payments, and even if there’s a gap of more than three month between payments, it doesn’t break the series;
Different types of leave are all the same;
Using 365 days to calculate holiday pay is not a good approach because it includes both working and non-working days.
Originally, this judgement only applied in Northern Ireland and did not extend to the UK. However, the Supreme Court’s recent ruling now applies to all UK employees.
The law
The main sticking point in this case was the time limit on claims and what should count as a 'series'.
According to the law there are two ways a worker can bring claims for underpaid holiday:
Section 23 of the Employment Rights Act 1996
Regulation 30 of the Working Time Regulations 1998
In short, both laws say that a worker can make a claim for unlawful deduction of wages within three months. But within three months of what exactly?
For an unlawful deduction from wages claim, the three months begin from the date of the last underpayment. And this kind of claim is preferred by workers because they can include past underpayments as part of a series, as long as they file their claim on time.
However, recent cases (including Wood and others v Hertel and Fulton and Bear Scotland Limited) raised the question whether voluntary overtime and some allowances should be counted in holiday pay.
Off the back of these cases, the court decided that rules should be put in place to limit how far back workers could link underpayments. They said the first 20 days of leave had to include overtime, while the remaining eight days didn’t, and gaps between different types of leave or more than three months between deductions would break the series.
PSNI argued that, according to this, claims stemming from deductions made more than three months ago should not be allowed. However, the employees argued that these deductions should be seen as a part of a series, which would allow them to make a lot more claims.
The judgement
Ultimately the Supreme Court sided with the employees and dismissed the PSNI’s appeal.
While previously it had said that any gap of 3 months or more between payments would break a series and prevent further claims, in this case it overturned this and ruled that underpayments for holiday pay should be viewed as a ‘series’ of underpayments.
The rationale for this was based on the introduction of section 23 of the Employments Rights Act 1996 by Parliament to help workers who might face repeated deductions from their wages, which result in them being paid too little not just once, but multiple times on different occasions.
They said the three month time limit could disadvantage employees who took holidays more than three months apart. It could also be used by employers to “game the system” by deliberately spacing out holiday payments over more than three months. Under the previous ruling, employees would have to make separate claims for each deduction, which would be unfair to them.
Instead, they ruled that what can be defined as a series depends on how similar or different the deductions are, how often they happen, how big their impact is, and more. They clarified that one correct payment, based on the same calculations, doesn’t stop a series of deductions. So, if an employer pays holiday pay correctly once, it doesn't prevent a claim for a series of deductions, including historical underpayments.
What does this mean for employers?
Underpayment of holiday pay could count as a series of unlawful deductions
Workers may be able to connect underpayment of holiday pay as a series of unlawful deductions depending on the specific details of each case, but certain factors will be taken into account like:
How similar the deductions are;
How often they happen;
How much money is taken;
The effects on the worker;
Why the deductions happened;
What ties them together.
While reasons for underpayment might differ from one employer to another, workers can likely point to a common fault in their claims. In this case, the “common fault” was holiday pay being wrongly calculated at basic rate.
However, workers won’t be able to link deductions like sick pay or underpaid bonuses with underpayment of holiday pay claims. Instead, the deduction has to come from the same source.
Furthermore, in England, Wales and Scotland, workers can only claim underpaid holiday pay for up to two years. This is different in Northern Ireland, where claims can go back as far as 1998 for long-term employees
All leave types are the same
Employers can’t differentiate between different types of leave (such as Directive leave, WTR leave, contractual leave) to reduce their liabilities. Instead, all leave types are considered the same and aren’t distinguished from each other.
However, employers can still set out different leave types in their employment contracts. For example, they can say that they pay holiday pay at the worker’s regular rate for four weeks then reduce it to basic pay for the remaining period.
Employers should use working days only to determine holiday pay
The Supreme Court ruling said using 1/365 days to calculate holiday pay is not a good approach because it includes both working and non-working days.
Instead, employers should use working days to determine a day’s holiday pay.
Get legal help for holiday pay claims
To avoid legal action from employees, it is important for employers to correctly figure out holiday pay and the amount of holiday employees should get.
Even with the guidance given by these rulings, there are still uncertainties around holiday pay which can make it tricky to calculate holiday pay correctly.
The best way to reduce liabilities in relation to holiday pay, it is wise to seek the help of an expert employment lawyer, who will be able to provide assistance with these matters in line with recent changes to the law.
At Lawhive, our expert lawyers and solicitors are on hand to help you with any employment issues you may face regarding holiday pay. To get started, tell us about your situation and we will match you with the best employment solicitor for your case quickly, as well as give you a no-obligation fixed fee quote for the suggested work.