In the recent case of Chief Constable of Northern Ireland Police v Agnew the Court of Appeal in Northern Ireland has considered the controversial issue of historic underpayment of holiday pay. The court has held that a series of holiday pay deductions is not broken by a 3 month gap, meaning that the scope for workers to bring substantial retrospective claims in Northern Ireland is increased. This case leads to a divergence between the law on historical holiday pay claims in Northern Ireland and Great Britain.
Summary of current law
Over the last 10 years, holiday pay has been one of the key topics of interest in employment law. It continues to be a very complicated and controversial subject.
It was previously settled practice in the UK that holiday pay was based on basic salary only. However, in a number of cases, the European Court of Justice held that holiday pay must be based on normal remuneration and therefore must include additional payments, such as overtime pay and certain allowances. Employees have increasingly been bringing claims for underpayment of holiday pay on this basis.
One of the most controversial aspects of the holiday pay saga is how far back employees are able to claim this underpayment. Employees may bring claims for unlawful deduction from wages in respect of a series of underpaid holiday payments. The landmark Employment Appeal Tribunal (EAT) case of Bear Scotland Ltd v Fulton in 2014 found that employees may not be able to claim holiday pay for the entire period of their employment (or going back to October 1998 when the Working Time Regulations came into effect). In the Bear Scotland case the EAT held that a gap of more than 3 months between underpayments of holiday pay will break the series of unlawful deductions. Therefore, if there is a gap between periods of holiday of around three to four months (depending on exactly when the holiday payments were made), the employee would not be able to claim for any underpaid holiday pay for any holiday they took before that period. A lawful payment of holiday pay could also break the series of unlawful deductions.
The rules in relation to ‘normal remuneration’ for holiday is a European concept. The EAT in Bear Scotland confirmed that its decision applied only to the 4 weeks of holiday derived from the European Working Time Directive and not the additional 1.6 weeks of holiday under the UK Working Time Regulations. The judge also said that, in his view, an employee might be deemed to take the “European” holiday first, followed by the “UK” holiday and any additional contractual holiday. This could mean that at the end of the holiday year, holiday pay would be correctly paid (as the European rules do not apply to the last 1.6 weeks of holiday), thus breaking the series of deductions at the end of each holiday year.
Shortly after the Bear Scotland case, the government implemented regulations providing that, for claims brought on or after 1 July 2015, an employment tribunal can only look back two years from the date of the claim when considering unlawful deductions. This rule does not apply in Northern Ireland.
These regulations, together with the Bear Scotland decision, gave employers some comfort in relation to historic holiday pay claims in Great Britain.
A large number of Northern Irish police officers brought claims for underpayment of holiday pay against the Police Service of Northern Ireland on the basis that their holiday pay was based on basic pay and did not take into account overtime. They brought claims for deductions from wages, under the Northern Irish law, which is the equivalent of the deduction from wages regime in Great Britain.
The industrial tribunal upheld the claimants’ claims going back to November 1998. The Police Service appealed.
The Court of Appeal in Northern Ireland ('NICA') considered a number of points in this case which are of interest to us in Great Britain. In particular, they looked at the following:
Whether the Bear Scotland case was right that a gap of over 3 months or a lawful payment breaks a series of deductions.
The NICA declined to follow the decision of the EAT in the Bear Scotland case. It held that a 3 month gap between holiday pay deductions does not break the chain of a series of deductions. Further, it said that lawful payment of correct amounts would not interrupt the series of deductions either. A number of deductions could be a series simply because they were factually linked by the mistake in underpayment.
In this case, all the underpayments since 1998 were factually linked by the method of calculation.
If this decision applied in Great Britain, this would significantly increase the risk of historic holiday pay claims, although there would still be the comfort of the regulations limiting unlawful deductions to 2 years.
Whether holiday had to be taken in a particular sequence. Was Bear Scotland right that European leave is taken first?
The NICA held that there was no requirement for leave from different sources to be taken in a particular order. The police officers in this case were entitled to 20 “European” days’ holiday, 8 “UK” days’ holiday and 2 contractual days’ holiday. The NICA agreed that it was not possible to allocate the total 30 days between the different categories of leave. Instead, each day would be a fraction of each type.
If the NICA is right that the correct payment of holiday pay does not break the series of deductions, it does not matter so much when the “UK” parts of the holiday are taken, unless an employer has made the decision to pay basic pay for “UK” holiday and normal pay for the “European” aspects. In any event, it should still be possible for an employer to specify when certain types of holiday are taken in the contract of employment to seek to avoid the complication of each day of holiday taken being a fraction of each type of holiday.
Thoughts on the appropriate reference period for calculating holiday pay
The NICA encouraged the parties in this case to agree a “pragmatic, administration friendly method” of calculating normal pay for holiday pay purposes based on average pay over a rolling 12 month reference period immediately preceding the holiday.
Under the current law in Great Britain, a 12 week reference period is used for calculating pay where necessary. This 12 week period does not necessarily allow a fair analysis of normal remuneration. From 6 April 2020, the 12-week reference period will be extended to 52 weeks (or the number of complete weeks for which the worker has been employed, if that period is less than 52 weeks).
Although this case is in Northern Ireland and so is not formally binding on the tribunals and courts in Great Britain, the principles of the decision are directly relevant in Great Britain and may be persuasive. Furthermore, given the enormity of the potential cost of this decision to the Northern Irish police service (they are estimating historic liabilities could be around £30 million), there seems likely to be an appeal to the Supreme Court. Any decision by the Supreme Court would be binding in Great Britain.
The Bear Scotland EAT decision was arguably a creative bit of judicial decision making to seek to limit unexpected potentially massive liabilities for employers. It was ripe for further consideration. This case may be just the start of such reconsideration.