Holiday pay - Could it all change again?

Although the summer holiday season now feels like a distant memory, the issue of how to calculate holiday pay is still bubbling away. We look at the potential impact a recent case in Northern Ireland could have on the rest of the UK.

The recent judgment of the Court of Appeal of Northern Ireland (CA) in the case of Chief Constable of the Police Service of Northern Ireland -v- Agnew & Others has thrown the issue of holiday pay into a state of disarray (again). Although this decision is only relevant to Northern Ireland, employers in the rest of the UK are keeping a close watch on this case, as it may ultimately result in a turnaround in the rules relating to holiday pay claims across the whole of the UK.

How far back can an employee claim for underpayments of holiday pay?

The law in relation to the calculation of holiday pay has evolved considerably over the last decade. First came the case of Williams v British Airways Plc which confirmed that a worker’s holiday pay cannot be calculated on basic pay alone and must include all remuneration which is “intrinsically linked to the performance of tasks” which the worker is required to perform under their contract.

Next came a string of cases regarding overtime, including the landmark decision of the Employment Appeal Tribunal (EAT) in Fulton v Bear Scotland. This judgment confirmed that non-guaranteed overtime worked during the reference period should be taken into account in calculating the worker’s holiday pay (subsequent case law has extended this principle to include voluntary overtime as well). However, Bear Scotland also had wider implications because it was in this case that the EAT confirmed that a series of unlawful deductions (which incorrectly paid holiday could amount to) is broken by a gap of three months or more.

Following this judgment, the government implemented new regulations which established a two-year backstop on unlawful deduction from wages claims in England, Scotland and Wales for underpaid holiday pay.

The decision in Bear Scotland and the introduction of the two-year backstop were embraced by employers in England, Scotland and Wales because they limited the extent to which workers could bring claims for underpaid holiday pay stretching back over a number of years and therefore limited the financial exposure of employers in this area.

Chief Constable of the Police Service of Northern Ireland (PSNI) -v- Agnew & Others

The CA’s judgment in this claim, which was delivered in July this year, has hit the headlines because it is entirely contrary to the principle established by the EAT in Bear Scotland - that a series of unlawful deductions will be broken by a gap of three months or more. The CA in Agnew concluded that this principle does not correlate with Northern Irish legislation and a series of deductions is not necessarily brought to an end by a gap of three months or more between unlawful deductions.

Due to the lack of the two-year backstop in Northern Ireland, this decision has significant implications for employers in Northern Ireland, as it could result in workers being able to claim back many years of incorrectly calculated holiday pay.

The CA in Agnew also considered the fact that the rules on the calculation of holiday pay currently only apply to the 20 days of leave granted to workers under the European Working Time Directive and not the additional eight days of leave which workers in the UK are entitled to take under our domestic legislation. The CA’s view was that all parts of annual leave, from whichever source they derive, should be treated the same. If upheld by the UK Supreme Court on appeal, this could have an impact on employers across the UK, who have only been taking overtime into account when calculating a worker’s holiday pay for the first 20 days of their annual leave entitlement.

The PSNI is expected to appeal the CA’s decision to the UK Supreme Court and if this appeal goes ahead the Supreme Court’s decision will apply to the whole of the UK (and not just Northern Ireland).

Due to the formal two-year backstop in place in the rest of the UK, even if the principle that a three-month gap in a series of unlawful deductions will break the chain of deductions is overturned by the Supreme Court, there is a clear limit on how far back workers in England, Scotland and Wales will be able to claim for underpaid holiday pay. However, for employees in NI, as there is no backstop, their claims could potentially stretch back to either the commencement of their employment or the commencement of the Working Time Regulations (Northern Ireland) 1998, which is likely to cause significant financial consequences for employers in Northern Ireland. Employers are well advised to keep a watching eye on how this case develops.