Supreme Court's landmark holiday pay ruling – what HR should do now to prepare for the fallout

Following the case of hundreds of police officers in Northern Ireland who are owed back pay, People Management investigates what it means for other businesses

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Following a ruling by the Supreme Court, many UK workers may be entitled to thousands of pounds in miscalculated holiday pay. 

The judgment, handed down last week (4 October), determined that thousands of police staff in Northern Ireland would be able to reclaim up to 35 years’ worth of miscalculated holiday pay, amounting to a bill of more than £40m. 

The court concluded in Chief Constable of the Police Service of Northern Ireland v Agnew that a three-month interval between underpayments of holiday pay did not automatically sever the chain of deductions. 

The chief constable of the Police Service of Northern Ireland (PSNI) and the Northern Ireland Policing Board accepted that the respondents were underpaid but disputed the period for which they were entitled to recover. 

The Supreme Court, however, “unanimously” dismissed the appeal. According to the court, the PSNI’s approach was based on a provision in the Working Time Regulations that “restrict the police officer claimants to claim only sums relating to holiday pay that they paid in the three months before their claims were started before the tribunal”. 

According to Colin Godfrey, employment lawyer at Taylor Wessing, the Supreme Court's decision "now brings the rest of the UK into line with this judgment”, which means that "gaps of more than three months will no longer prevent individuals from bringing claims for a series of underpaid holidays". 

He adds that it will still be "necessary to establish" that there was a series of deductions, which would depend on whether they were sufficiently similar, but this decision "potentially opens" the way for significant claims for underpayments over two years – emphasising the importance of getting holiday pay calculations right. 

With the ruling putting holiday payback in the spotlight and threatening businesses that have not calculated pay correctly, People Management investigates what HR teams should be doing.

What did the court rule?

In 2019, the Northern Ireland Court of Appeal upheld a ruling that staff had not received the holiday pay they had been entitled to for many years.

More than 3,700 PSNI officers and civilian staff filed claims with the industrial tribunal to recover sums they should have been paid as part of their holiday pay since November 1998. 

They were not paid these sums because for many years it was assumed that it was adequate to pay respondents an amount equal to their basic wage for the weeks they were on holiday. 

However, according to European case law, they should have been paid their "normal" pay while on vacation, not only their basic pay. Because many of the respondents augmented their pay by working mandatory overtime, the regular pay should have included an element for overtime.

What are the implications for employers? 

Crawford Temple, CEO of Professional Passport, says it is a landmark case and one that will have a “significant impact” on the umbrella sector and how employers calculated and managed holiday pay for their workers. “The ruling now imposes rules on employers to ensure that holiday pay is calculated in line with the hours worked,” he says, adding that “undoubtedly” we could see retrospective claims on holiday pay that have been miscalculated. 

As such, Temple stresses that employers, including umbrella companies, should take time to review and evaluate their holiday pay practices before they are potentially hit with a host of back claims, which in the UK could go back as far as two years. 

This comes after the case of Harpur Trust vs Brazel established that staff who only work part time – ie term time for teaching staff – should be entitled to their full entitlement of annual leave, which Temple says adds "further complexity for the umbrella market to ensure the correct application of holiday pay is made".

According to Jo Moseley, associate at Irwin Mitchell, the court made it clear that if an employee brings a claim within three months of the last of a series of deductions "employers cannot use technical legal arguments to limit their liability".

As a result, most employees bringing these types of claims will now be able to recover up to two years' worth of losses and much more in Northern Ireland, where claims can go back to 1998. 

Moseley also says the ruling is likely to generate "concern" for companies that have failed to include overtime payments, allowances or certain commission payments and have undervalued their employees' holiday pay. “Workers may feel emboldened to bring claims now that the law is clear and much easier to understand,” she adds.

What should HR professionals do now?

According to Oli McCann, partner and employment solicitor at AfterAthena, HR teams should review and seek advice on their employment contracts, holiday pay and holiday practices to determine whether they have been paying "normal remuneration" for all staff.

However, he adds that where normal remuneration has not been paid for holiday leave then they should “urgently” seek advice on how to regularise the position and reduce the size of holiday pay claims to avoid expensive back pay claims. “Any existing tribunal claims stay pending the outcome of the Agnew case, which re-evaluates the merit of any defence put forward and the size of any potential liability,” says McCann. 

Ian McFarland, partner at Eversheds Sutherland, says the “key initial task” for any HR team is to review the approach to the calculation of holiday pay as employers need to ensure that they are calculating holiday pay to take account of all aspects of normal pay. “If they have been paying basic pay only or are otherwise off the mark, the next step is to calculate the potential liability and determine an action plan,” he explains.

He says he expects employees and their representatives to “mobilise” and, with the threat of complicated litigation “looming large, understanding the extent of any problem and getting ahead of it will be the best approach”. 

Ian Moore, managing director of HR consultancy Lodge Court, says the Supreme Court ruling could result in a "significant financial burden and a logistical nightmare for employers as they attempt to calculate and distribute payments to current and former employees.

"It's not enough to simply look at payslips; factors such as whether an employee was entitled to bank holidays or how many days of annual leave they accrued can complicate matters further." 

However, he says that rather than "panicking and burying their heads in the sand", employers should take action now to address the issue, which includes evaluating corporate rules, engaging with legal professionals and communicating any changes or updates to staff.

Joanne Frew, global head of employment and Pensions at DWF, says holiday pay is a complex area of employment law and has been subject to repeated changes through emerging case law. 

As a result, employers that are concerned about holiday pay claims should carry out a holiday pay audit, which will help to measure the “financial risk of claims”, she says. 

Frew adds that it is important that holiday pay is paid correctly to reduce the risk of claims. “Case law has made it clear that holiday pay should be related to normal pay including items such as regular overtime and commission. Where employers are unsure what to include, specific legal advice should be taken,” she says. 

Frew also says employers should keep up to date with changes in this area of law, stressing that we have seen a “huge amount of case law on the topic” of holiday pay and will expect to see “legislative change” with the government undergoing two consultations.

In addition, according to Samantha O’Sullivan, policy lead at the Chartered Institute of Payroll Professionals, the case relates to Northern Ireland where there is no backstop for backdating claims, whereas the rest of the UK has a two-year backstop, which “could represent a very large liability for businesses that may have been operating non-compliant holiday pay calculations”.

As a result, she says that, coupled with the recent Harpur Trust v Brazel case, “businesses should review their situation and assess the risk to the business of backdated claims that could not stretch further than where a three-month break would break a series”.