In the recent case of Chief Constable of Northern Ireland Police v Agnew, the Supreme Court 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 three month gap, meaning that the scope for workers to bring substantial retrospective claims in Northern Ireland is increased. In Great Britain, the implications of this case are limited by the two year backstop on unlawful deductions for holiday pay.
Background
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 and now the UK courts have held that holiday pay must be based on “normal remuneration” and therefore must include additional regular payments, such as overtime pay and commission. 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 can 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 three 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. The EAT also held that 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 four 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” leave first, followed by the “UK” leave and any additional contractual holiday. This could mean that, if the employer pays basic pay only, 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 for holiday pay (the two year backstop). 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.
Facts
A large number of police officers and civilian staff brought claims for underpayment of holiday pay against the Police Service of Northern Ireland on the basis that their holiday pay was calculated on basic pay and did not take into account compulsory 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, when the Working Time Directive was implemented in Northern Ireland. The Police Service appealed. The Court of Appeal in Northern Ireland rejected the appeal, holding the EAT case of Bear Scotland was incorrect. The case was then appealed to the Court of Appeal and finally the Supreme Court.
Decision of the Supreme Court
The Supreme Court held in favour of the employees. The court considered a number of points, in particular, they looked at the following:
Was the Bear Scotland case correct that a gap of three months or a lawful payment breaks a series of deductions?
The Supreme Court said that the purpose of the unlawful deductions regime is to protect workers, some of whom may be vulnerable. The imposition of a mandatory cut off after an interval of three months might produce unfair consequences and could permit a canny operator to game the system by spacing out payments. The court looked at other forms of deductions – for example, sick pay deductions. Workers have no control over when they are sick, so it is illogical to prevent them from bringing a deduction claim if there is a gap of more than three months between periods of illness, when the employer is consistent about underpaying. The court held that the reasoning in Bear Scotland derives no support from the express words in the Employment Rights Act 1996.
What is a series?
The court held that a series is simply a number of things of a kind which follow one another in time. Whether deductions constitute a series depends on the similarities and differences between the deductions – their frequency, size and impact, how they came to be made and applied, what links them together and “all other relevant circumstances.” The court held that it is important to identify the fault that underpins the deductions. In this case, all the unlawful deductions were factually linked by the common fault of incorrect holiday pay calculation. So, all holiday underpayments could be linked back to November 1998, without being broken by intervals of three months or more.
Did correct payments break the series of deductions?
The court held that the fact that the employees were paid correctly during periods of work, did not interrupt the series, as the deductions were all in relation to holiday pay. Furthermore, the series was not broken by any correct payment of holiday pay (for example, basic holiday pay for the 1.6 weeks of UK leave) as these payments, in common with the other payments in the series, came about by virtue of the same fault in calculating holiday pay.
Whether holiday had to be taken in a particular sequence: was Bear Scotland correct that European leave is taken first?
The court held that annual leave does not need to be taken in a particular sequence. It noted that the significance of this issue is considerably diminished by “our conclusion that a series of deductions does not come to an end, as a matter of law, simply because it has been interrupted by a lawful payment”.
Comment
The decision in this long-running Northern Irish case is now binding in the rest of Great Britain. This decision has massive implications in Northern Ireland, where the two year backstop does not apply. The Northern Irish police service are estimating historic liabilities could be around £30m. In the rest of Great Britain, the implications are less extreme, as the two year backstop on unlawful holiday deductions limits the value of such claims.
Frances Rollin