Supreme Court dismisses holiday pay appeal: what does it mean for HR?

Amy Collins examines the latest ruling on incorrect holiday payments and its implications for employers

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The background to the case of Chief Constable of the Police Service of Northern Ireland v Agnew is that, for many years, the Police Service of Northern Ireland (PSNI) had incorrectly paid holiday pay to officers and civilian staff by reference to basic pay only, rather than their ‘normal pay’. It has already been established through separate litigation that holiday pay should be the same as what the individual normally earns when working, including any regular overtime, commission or bonus.

In this particular case it had already been accepted that the PSNI had paid holiday pay incorrectly. The key question for the Supreme Court was whether or not those incorrect underpayments of holiday pay formed part of a ‘series’ of deductions from pay. 

Typically, there is a three-month time limit to bring a claim for underpayments of holiday pay from the date of the underpayment. However, if the underpayment forms part of a series of underpayments, the time limit is extended to cover underpayments that form part of the series, provided the claim is brought within three months of the last underpayment in a series.

It had previously been decided in 2015 (Bear Scotland v Fulton) that a three-month gap between incorrect payments, or the presence of a correct payment, would ‘break the series’, meaning the claim could not go further back than this ‘break’. These findings were challenged by the NI industrial tribunal, and the Northern Ireland Court of Appeal (NICA) in the current case.

The Supreme Court has now upheld the decisions of the NI industrial tribunal and the NICA, agreeing that a three-month gap between underpayments, or the presence of a correct payment, should not automatically break the series of underpayments. Instead, the Supreme Court said a series of deductions could be established where there was the presence of a ‘common fault’ linking the underpayments. In this case, that ‘common fault’ was the calculation of holiday pay based on basic pay, rather than normal pay. Ultimately, the question of whether a payment forms part of a series will be a question of fact to be considered by tribunals on a case-by-case basis. 

Impact on employers

The Supreme Court’s decision will have legal and cost implications for all UK employers, making it easier for workers to claim for historic underpayments of holiday pay. However, the decision will undoubtedly have more significant financial ramifications for employers in Northern Ireland, where there is no equivalent to the GB two-year ‘back stop’ legislation that limits unlawful deductions claims to two years from the date a claim is lodged.

Provided businesses are paying holiday pay correctly, this decision will have little impact for them. However, if an employer is paying holiday pay incorrectly, this decision will undoubtedly increase the potential liability that would arise from a claim for holiday pay. In theory, some workers in NI could seek to recover underpayments in respect of holiday pay as far back as the enactment of the Working Time Regulations 1998 or the beginning of their employment (whichever is more recent).

If employers have not already done so, they should conduct a review of their existing approach to holiday pay calculations and ensure that annual leave is calculated and paid by reference to normal remuneration, not ‘basic pay’. Where holiday pay is paid incorrectly, businesses should engage with their workforce and seek to rectify this as soon as practicable. 

Amy Collins is a senior associate in the employment team at TLT