Holiday pay: The gift that keeps on giving

What’s the issue?

Employers will be very familiar with the long-running saga in the Employment Tribunals relating to the calculation of holiday pay. Many may have relied on principles from previous case law to argue that a gap of more than three months between payments, or the making of a correctly calculated payment, breaks the chain of deductions to conclude that a claim has been brought out of time. Employers may need to rethink these strategies in light of a recent decision.

What’s happened?

In its long-awaited decision in the case of Chief Constable of the Police Service of Northern Ireland v Agnew [1], the Supreme Court last week ruled that neither a gap of three months between underpayments of holiday pay, nor an instance of a correct payment, will automatically break the chain of a series of deductions.

The decision

In this case, employees of the Police Service of Northern Ireland had been paid their basic pay during periods of annual leave. Their pay didn’t include overtime and certain allowances, which was contrary to EU law requiring employees to receive their “normal” pay whilst on holiday.

A claim for unlawful deduction of wages must be brought within three months of the alleged deduction, and where a claim is brought in respect of a series of deductions, that claim must be brought within three months of the latest deduction in the series. In the 2014 case Bear Scotland v Fulton [2], the Employment Appeal Tribunal ruled that either a gap of more than three months between underpayments of holiday pay, or a single instance of correctly paid holiday pay, would break the series of deductions and, in those cases, an employee would not be able to claim in respect of underpaid holiday pay beyond that “break”.

In its decision in Agnew, the Supreme Court has therefore overturned the Employment Appeal Tribunal decision in Bear Scotland.

The Supreme Court held that, in order for a series of deductions to be established, the subject matter of each deduction must be sufficiently similar: for example, in Agnew, the common fault was that holiday pay was based on basic pay rather than normal pay. Once that connection between the deductions had been established, “…intervals of more than three months did not, in and of themselves and as a matter of law, break the series or bring it to an end“.  

This case could expose employers who have been incorrectly calculating holiday pay to further liability for backdated holiday pay underpayments. This is particularly so in Northern Ireland, where liability in respect of underpaid holiday pay could extend as far back as 1998 (when the Working Time Regulations were introduced). The exposure of the Police Service of Northern Ireland in this case has been estimated at £30-£40 million and is a case in point. However, in England, Scotland and Wales, the Deduction from Wages (Limitation) Regulations 2014 impose a two-year limit on any unlawful deduction of wages claims brought after 1 July 2015, which will serve to limit employers’ exposure.

Holiday pay as a “composite pot”

The Supreme Court in Agnew also ruled that holiday is not to be segregated into Working Time Directive leave, UK statutory leave and contractual leave; each day’s holiday should be viewed as a “composite” of all three elements. This adds complexity due to the different rules which apply to each, for example in terms of the order in which holiday is deemed to have been taken, whether holiday can be carried forward into a subsequent holiday year, and how employees should be paid for it, noting that whilst employees taking “Working Time Directive leave” must be paid at their “normal” rate of pay, this is not currently the case for other types of leave. Employers who draw this distinction may be permitted to continue to do so, but the judgment does not delve any further into this issue and, in this respect, raises further questions.

What do we need to do now?

Employers should ensure that holiday pay is calculated correctly going forwards. Despite the decision of the Supreme Court that a single correct payment will no longer automatically break the chain of a series of deductions, the limitation period remains three months from the last unlawful deduction and so a correct payment will start the clock on the limitation period.

Holiday pay calculation: how we can help

The Supreme Court decision is likely to bring the issue of holiday pay back on the radar. Employers who are concerned about liability for unlawful deductions of wages should carry out an audit of holiday pay to allow them to understand the potential exposure. Our Employment team can help employers to decide on next steps where an audit reveals a potential issue.

[1] [2023] UKSC 33

[2] [2014] UKEATS/0047/13