Supreme Court overturns ‘three month break’ rule in holiday pay claims

Written on 13 October 2023

Following several important cases that have affected holiday pay legislation in recent years, the Supreme Court has now determined that a three-month gap between historical underpayments will no longer disrupt the chain of deductions in holiday pay cases, increasing employers’ exposure to claims.

The decision, which landed on 4 October, follows a lengthy legal dispute between the Police Service of Northern Ireland (PSNI) and thousands of Police Officers and civilian employees.

In this blog, we explain the legal principles underpinning this case, unpack the Supreme Court’s decision, and explore the potential impact of this latest development to holiday pay rules on workers and employers across the UK.

The background

Employment law is a devolved issue in Northern Ireland. This means the government can pass laws regarding employment rights that may differ from the rest of Great Britain. Holiday rights, however, are broadly the same across the UK.

Holiday rights legislation also implements the European Working Time Directive (WTD).

To understand the issues at play in this case, it’s important to note the following facts:

  • All workers are entitled to a minimum of 5.6 weeks’ leave in a leave year. This is comprised of leave derived from the WTD (4 weeks) and additional leave (1.6 weeks).
  • Pay is calculated by reference to what are commonly referred to as the week’s pay provisions, which, while covered in separate legislation in Great Britain and Northern Ireland, are broadly the same.
  • Case law has established that in respect of WTD-derived leave, pay must reflect “normal remuneration” and should therefore include overtime and commission payments if they are regular enough to form part of normal pay.
  • Under holiday rights legislation, if there is an underpayment of holiday pay, a worker can pursue a claim for payment. However, they must issue the claim within three months of the underpayment.
  • Under additional legislation covering unlawful deductions, which includes holiday pay, claims must be issued within three months of the last deduction, but there is an opportunity to include further historical deductions if they form part of a ‘series of deductions’, i.e. they are linked by the same underlying cause.
  • In GB, the case of Bear Scotland v Fulton established that in ‘series of deduction’ claims, a gap of more than three months between each deduction would break the sequence, limiting how far back claims can extend. Subsequently, the Deduction from Wages (Limitation) Regulations 2014 were introduced, which restricted such claims to a maximum of two years’ worth of back pay.
  • Crucially, Bear Scotland was not legally binding on Industrial Tribunals in Northern Ireland, and there are no equivalent back-stop regulations in place. Consequently, claims for unpaid holiday pay in Northern Ireland could potentially extend all the way back to 1998, when the Working Time Regulations (Northern Ireland) were introduced.

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PSNI v Agnew

This case involved 3,380 Police Officers and 364 civilian employees of the PSNI who found issues with their holiday pay, which had been calculated based on their basic pay alone without factoring in overtime. The officers and employees filed claims for a series of deductions dating back to 1998.

The PSNI acknowledged that they had indeed underpaid these individuals by not including overtime in holiday pay calculations. However, they argued that:

  • Police Officers were explicitly excluded from making ‘series of deductions’ claims, which meant they could only claim for deductions in the previous three months.
  • When determining whether a ‘series of deductions’ had occurred, the Bear Scotland case should also apply in Northern Ireland, meaning a three month gap between underpayment could break to chain and limit the amount employees could claim.
  • WTD leave should be taken first, which would also serve to create a gap of three or more months between underpayments, disrupting the series of deductions.
  • The PSNI also presented their ideas about the appropriate reference periods to be used when calculating average pay for holiday pay purposes.

The Industrial Tribunal and Court of Appeal rejected these arguments and upheld the workers’ claims. These decisions were not binding on Tribunals and Courts in Great Britain.

The PSNI appealed to the Supreme Court, whose decision would be binding on the whole of the UK.

Supreme Court decision

The questions for the Supreme Court to decide were as follows:

  • Did the Police Officers even have the right to bring a claim?

The PSNI argued that the lower courts had been wrong to find that Police Officers were entitled to pursue unpaid holiday pay claims on the basis of a series of deductions. The Supreme Court disagreed. 

They added words to the Northern Ireland holiday rights legislation to allow all workers who have holiday rights to make claims for a ‘series of deductions’, just like those available to other workers, thereby allowing them to seek compensation for multiple instances of underpaid holiday pay as long as they formed a series of deductions.

  • What constitutes a ‘series of deductions’?

The Supreme Court agreed with the lower Courts that a gap of three or more months will not necessarily break the series of events and overturned the EAT decision in Bear Scotland.

It ruled that whether two or more deductions constitute a series of deductions will depend on the unique facts and details of each case, considering all the relevant circumstances. This may include the similarity between the type of deductions, their frequency, size, impact, how they were made, and what links them together.

In this case, the Supreme Court concurred with the Court of Appeal that there was a link between all of the deductions in that all of the payments were calculated using basic pay only. In addition, a correct payment during that period would not necessarily, and did not here, break the series of deductions.

Ultimately, the Supreme Court unanimously dismissed the PSNI’s appeal, allowing the claimants to reclaim up to 35 years’ worth of miscalculated holiday pay, amounting to a bill of more than £40m.

The impact: increased exposure to holiday pay claims?

This decision finally resolves the long-disputed ‘cut off’ for backdated holiday pay claims when pursued in the Tribunal as claims for unlawful deduction from wages.

The judgment makes it clear that a three-month gap between alleged deductions or a lawful payment will no longer automatically break a series of deductions. Consequently, employees now have the potential to reclaim arrears dating back well beyond three months if they can establish a series of series of deductions, putting employers at increased risk of facing claims going back even further than before.

The greatest monetary impact of this decision will be felt in Northern Ireland, where there is currently no restriction on how far back claims can go. The impact in the rest of the UK won’t be quite as significant in light of the two-year backstop on unlawful deductions from wages claims.

This case isn’t just about holiday pay; it will also be relevant to other types of unlawful deduction claims when assessing whether there is a series of deductions.

Other questions answered by this case

This case also clears up several other questions about holiday pay and underpayments, with the Supreme Court concurring with the lower courts on various key issues, including:

  • The order of leave: The case considered whether there is a specific order for taking different types of leave, which could affect the timing of deductions. The Supreme Court agreed with the Court of Appeal that unless different types of leave can be clearly distinguished, all leave should be considered together as a single total.
  • Calculating overtime pay: When determining average overtime pay for holiday purposes, the question was whether employers should use calendar or working days. The Supreme Court aligned with the Court of Appeal, advocating that employers base calculations on the actual days a worker has worked.
  • Reference period for weekly pay: Lastly, the case addressed the question of which reference period to use when calculating average weekly pay. The Supreme Court again agreed with the Court of Appeal that the appropriate period depends on the specific circumstances, but it’s important to note that holiday rights legislation in GB mandates a 52-week reference period in certain instances.

More to come?

This is the second significant Supreme Court decision on holiday pay rights within just over a year, following the landmark ruling in Harpur Trust v Brazel, so there has been a lot for employers to digest.

There could be more changes in the pipeline following government consultations on proposals to pro-rata holiday entitlement for part-year and irregular hours workers based on the annual hours they work and Retained EU Law. The outcomes of these consultations have not yet been released.

In any event, the provisions of the Retained EU Law (Revocation and Reform) Act 2023 come into force next year, which could have implications on how the European-derived elements of holiday rights and pay are interpreted in the UK.

It’s safe to say that the story of holiday pay rights is far from over.

Related Content

Take the hassle out of holiday pay with WorkNest

Calculating holiday pay is notoriously tricky, not only causing a real headache for employers but leaving the door open for underpayment claims. 

If you require practical support getting to grips with the rules, or you’re worried you might be exposed to claims following this latest ruling, our highly-qualified team of Employment Law specialists can offer expert advice, guidance and reassurance. We can also provide HR software to simplify calculations, minimise future risk, and save you time and stress.

To discuss how our fixed-fee Employment Law and HR support can help you to manage holiday entitlement and pay efficiently, and adapt to any future employment law changes, call 0345 226 8393 or request your free consultation using the button below.

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