UK Supreme Court Holiday Pay Ruling Has Significant Implications for Employers

UK Supreme Court Holiday Pay Ruling Has Significant Implications for Employers

In the case of Chief Constable of The Police Service of Northern Ireland and another v Agnew and others, the UK Supreme Court has delivered its much-awaited decision about unlawful deductions and underpayments of holiday pay.

In its ruling, the UK Supreme Court has determined that a gap of three months between underpayments of holiday pay, or where a lawful payment was made that would otherwise have broken a chain of a series of unlawful deductions, the chain of a series of unlawful deductions will not automatically be broken if the deductions can be factually linked to the preceding deductions by the common fault.

Current Time Limits on Unlawful Deduction Claims

The time limits for bringing claims for unlawful deductions has long been established in law, and subject to the rules on extension of time for early conciliation, a claim must usually be brought within three months beginning with:

  • For a deduction, the date of payment of the wages from which the deduction was made; or
  • For a payment to an employer, the date the employer received the payment.

(Section 23(2), ERA 1996.)

And where a complaint is brought in respect of a series of deductions or payments, the time limits begin to run with the last deduction or payment in the series, or the last of the payments so received (section 23(3), ERA 1996).

The implications for Employers Following This Ruling

In short, Employers will no longer be able to rely on the three-month gap rule, not just in relation to holiday pay claims but with claims about any kind of underpayment.

The unlawful deductions provisions of the Employment Rights (Northern Ireland) Order 1996 are identical to the unlawful deductions provisions in the Employment Rights Act covering Great Britain, so the implications of the UK Supreme Court ruling in this case are far reaching beyond Northern Ireland and has the potential to cost businesses millions of pounds across the UK.

For employers who failed to adjust holiday pay calculations following the various European Court decisions in cases such as Williams v British Airways Plc, Lock v British Gas Trading and others and Bear Scotland and others v Fulton and others, which ruled that holiday pay calculations needed to include overtime, commission, regular allowances, and who still calculate holiday pay with reference to basic pay, their financial liability could be significant.

Whereas in Great Britain (Scotland, England & Wales) the Deductions from Wages (Limitation) Regulations 2014 impose a two-year limit on deductions claims brought after 2015, thus limiting the potential liability to employers in Great Britain to back pay claims, these regulations weren’t introduced in Northern Ireland leaving employers in Northern Ireland far more exposed to claims that could stretch as far back as the commencement of their employment or the commencement of the Working Time Regulations (Northern Ireland) 1998.

How Should Employers Calculate Holiday Pay?

Following various ECJ and domestic cases on holiday pay under the Working Time Directive (WTD), the following elements of remuneration should be included in the calculation of holiday pay for leave under regulation 13 of the WTR 1998 (which implements the WTD), assuming they are paid regularly or repeatedly over a sufficient period to count as “normal remuneration”:

  • Commission payments.
  • Incentive bonuses.
  • Overtime pay including overtime premiums whether compulsory or voluntary, guaranteed or non-guaranteed.
  • Payments that relate to the “personal and professional status” of workers, such as those based on seniority, length of service or professional qualifications.
  • Productivity/performance bonuses.
  • Shift allowances and premiums (additional rates for working particular shifts, such as “time and a half”).
  • Standby payments and payments for emergency call-out duties.
  • Travel and other allowances that are treated as taxable remuneration.

The following elements of remuneration should not be included in the calculation of holiday pay for WTD leave:

  • Benefits in kind.
  • Bonuses not linked to workers’ performance.
  • Expenses (including travel expenses) which reimburse workers for costs incurred.
  • One-off bonuses and occasional payments.

For workers With No Normal Working Hours

If a worker does not have “normal working hours”, a week’s pay is calculated as an average of all remuneration earned in the previous 52 weeks, or the number of complete weeks the worker has been employed (if less than 52). This includes any overtime payments and commission.

Weeks in which no remuneration is due are ignored, as are any weeks when an employee is on maternity, paternity, adoption, parental, shared parental, or parental bereavement leave for any part of the week. Earlier weeks are then brought into account, up to a maximum of 104 weeks before the relevant date.

How Can Employers Mitigate the Risk of Claims?

The UK Supreme Court ruling in this case highlights the importance ensuring that holiday pay is calculated correctly.

In the first place, employers should undertake a comprehensive review of how holiday pay has been calculated in the past to determine whether they are exposed to potential claims for unlawful deductions from wages.

At the same time, employers should review how they are currently calculating holiday pay and ensure they include the various elements noted above (How Should Employers Calculate Holiday Pay?).

Holiday Law Reforms Post-Brexit

Following the UK Supreme Court decision in Harpur Trust v Brazel, which determined that the 5.6 weeks’ holiday entitlement for “part-year workers” on permanent contracts cannot be reduced to take account of periods when no work was done, the UK Government launched a consultation on a proposal to make holiday entitlement under the Working Time Regulations 1998 proportionate to hours worked.

This consultation ended in March 2023.

In May 2023, the UK Government launched a consultation on reform of holiday rights, which made the following proposals:

  • Creating a single annual leave entitlement of 5.6 weeks.
  • Clarifying the minimum rate of holiday pay and what counts as “normal remuneration”.
  • Changing the method for calculating accrued leave in a worker’s first year of employment.
  • Allowing rolled-up holiday pay.
  • Removing the exemption relating to carry-over of leave due to COVID-19.

This consultation ended in July 2023.

We explored these reforms and others in more detail here:  Reforms to Retained EU Employment Law

We will continue to closely monitor the situation and track this comprehensive and transformative legislation to ensure we keep ahead of the regulatory changes that are undoubtedly coming.

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