Supreme Court set to decide important holiday pay case

The Supreme Court will decide if historic holiday pay claims can be brought where there are gaps of three months or more between a series of underpayments. The outcome could have significant implications for employers across the UK.

It’s not often that a Northern Irish case sets a binding precedent for employers all over the UK, but the case of Chief Constable of the Police Service of Northern Ireland (PSNI) and another v Agnew and others (Agnew), which is due to be heard in the Supreme Court this month, is an important exception. Holiday pay has proved one of the most contentious and difficult areas of employment law over recent years, and the decision in Agnew will have financial and practical implications for employers on both sides of the Irish sea. 

The leading case of Bear Scotland

In 2014, the Employment Appeal Tribunal (EAT) handed down its decision in Bear Scotland v Fulton (Bear Scotland). This case established the rules for calculating holiday pay and claiming for underpayments of holiday pay, which employers in England, Scotland and Wales are required to follow today. The EAT held that:

• There is a difference between: 
  • the first 4 weeks of holiday which an employee is entitled to under the European Working Time Directive (WTD) (this is 20 days of leave for a full-time employee); 
  • the additional statutory leave which an employee is entitled to under our various domestic Working Time Regulations (this is 8 days of leave for a full-time employee); and 
  • any further additional leave that the employee may be entitled to under their contract of employment.
• Technically, employees only have to be paid ‘normal remuneration’ (see below) for their WTD leave (i.e. 20 days for a full timer) and this leave is deemed to be taken first. This rule increased the likelihood of showing a 3 month ‘break’ from the last occurrence of WTD leave to the end of each holiday year.
• A gap of three months or more between underpayments of holiday pay will ‘break’ a series of deductions/underpayments, so that an employee cannot make a claim for any underpaid holiday pay from before ‘the break’. In practice, this means that if an employee does not take WTD leave for 3 months and is paid correctly in the meantime, they cannot claim for any previous underpaid holiday pay.
• WTD leave pay must be based on a worker’s ‘normal remuneration’ and must take into account all types of overtime and any allowances/other remuneration which the employee receives for performing their contractual duties.

Following the decision in Bear Scotland, employers in England, Scotland and Wales were further assisted by the introduction of a ‘2-year backstop’, which prevented employees in those jurisdictions from claiming any holiday pay from more than 2 years ago. No such ‘backstop’ was implemented in Northern Ireland however, so if an employee in Northern Ireland could establish a series of underpayments of holiday pay, without any 3-month break in the middle, they could potentially claim for underpayments as far back as 1998 (when the Working Time Regulations implemented the WTD in the UK) or perhaps even further, to 1996 (when the WTD ought to have been implemented).

The Agnew case

The Agnew case involves Unison-backed claims from around 3700 police officers and civilian employees for many years of underpaid holidays and is potentially worth around £30 million. In 2019, The Court of Appeal in Northern Ireland (NICA) held that the Claimants in this case had been underpaid, but the case hit the headlines because the NICA calculated the holiday pay owed to the Claimants in a very different to the way the EAT had in Bear Scotland:

• NICA held there was nothing in the Employment Rights (Northern Ireland) Order 1996 (which is very similar to the Employment Rights Act 1996 which applies in the rest of Great Britain) that set any limit on the length of gaps between deductions, and therefore concluded that a 3 month period where the employee had been correctly paid would not ‘break’ a series of deductions so as to prevent claims for underpaid holiday pay before that period. If the underpayments could be factually linked, then they could form a series, even if they were more than 3 months apart.
• NICA took the view that all leave should be treated the same and there was no requirement that different types of leave should be taken in a particular order.

For those employers who have been following the letter of the case law and only paying employees ‘normal remuneration’ (i.e. holiday pay taking into account all overtime and other allowances earned) for their WTD leave (and basic salary only for all additional leave), the principle that all leave should be treated the same could have costly repercussions.

The case has now been appealed to the Supreme Court.  Initially, it looked like Agnew might settle, denying the Supreme Court the chance to resolve the conflict between NICA’s decision in Agnew and the EAT’s decision in Bear Scotland. However, settlement negotiations seem not to have been successful so far, and Agnew is now listed to be heard by the Supreme Court on 14 December 2022 with a judgment likely to follow in early 2023.

So, what could this mean for employers both sides of the Irish sea?

At present, NICA’s decision only applies to employers in Northern Ireland. However, the Supreme Court’s decision will apply to employers on both side of the Irish sea. 

If the UK Supreme Court agrees with NICA (as many commentators think it will), UK employers could face new holiday pay claims (which they had previously assumed were out of time) potentially dating back two years, or - in the case of Northern Irish employers - far, far longer than that. HR teams on both sides of the Irish sea should keep a close watch on developments in this case.