The long awaited judgment in Chief Constable of the Police Service of Northern Ireland v Agnew ("the Agnew Case") means that employers in Northern Ireland face considerably increased liabilities, although in Great Britain, Regulations currently limit liability to two years' back pay.
Holiday pay claims (whether that be for unpaid or underpaid holiday pay) can be made in one of two ways in Great Britain. That is either under the Working Time Regulations 1998 ("WTR") or as an unlawful deduction from wages claim under the Employment Rights Act 1996 ("ERA"). Claims under the WTR can ordinarily only extend back three months from the date a claim is made to an employment tribunal. An unlawful deductions claim however can be based on a "series of deductions", with only the final deduction in the series needing to be presented to a tribunal within three months. Northern Ireland has their own legislation ("the NI ERO" and the "NI WTR") that, as regards the provisions relevant to this case at least, mirrors what is said in the WTR.
Until 2014, it was thought that holiday pay claims could extend back over many years, with each holiday period where there was an underpayment forming one element in the series of deductions. However, in 2014, in Bear Scotland v Fulton the Employment Appeal Tribunal ("EAT") decided that if there was a break of three months or more without an unlawful deduction being made then the "series of deductions" would be broken. In practical terms that meant if a worker took holidays in January, had a second period of holiday in March, and then a third period in November and made a claim for unlawful deductions to a tribunal in December, the worker would only be able to claim for the November underpayment. That is because there was more than three months between the March deduction and the November deduction. However, had the employee been quicker off the mark and made a claim in April, they would have been able to claim both the January and March deduction as there had not been a three-month break interrupting the "series of deductions".
Very shortly after the Bear Scotland decision, the Deduction from Wages (Limitation) Regulations 2014 ("the Limitation Regulations") became law, taking effect from 1 July 2015. These Regulations cover Scotland, England and Wales, but not Northern Ireland. The Limitation Regulations impose a two-year limitation period on most unlawful deduction from wages claims, including claims for holiday pay. They also provide that Regulation 16 of WTR does not provide for a contractual right to paid leave, preventing holiday pay claims from being raised in the civil courts to get around this limitation period.
The Agnew Case
Meanwhile, in Northern Ireland, over 3,380 police officers and 364 civilians brought claims against the Police Service of Northern Ireland ("the Police Service") for underpaid holiday pay. The Police Service did not dispute that an underpayment had been made - holiday pay had historically been calculated on the basis of "basic pay", but a series of cases had subsequently established that, as regards the four weeks holiday derived from the EU Working Time Directive ("WTD"), holiday pay should be calculated by reference to "normal pay". That may include, for example, an element of pay for overtime a worker would normally work.
The Police Service did though dispute that the police officers were able to bring a claim under the NI ERO (which enabled them to claim for a series of deductions) as they are not "workers", limiting their claims to being brought under the NI WTR. While it was accepted that the civilian workers could bring claims under NI ERO, the Police Service argued, relying on Bear Scotland, that any series of deductions was broken where there was a gap of more than three months between them. If the Police Service were successful on both these points, then their liability for back pay would have been in the region of £300,000.
The Industrial Tribunal (as it is still known in Northern Ireland) and the Northern Ireland Court of Appeal ("NICA") found in favour of the claimants on these matters. The Police Service appealed to the Supreme Court.
The Supreme Court judgment
The Supreme court has dismissed the appeal, upholding the judgment of the NICA. The doctrine of equivalence requires Member States not to treat matters under EU law (WTD holiday entitlement implemented in the UK via the WTR and the NI WTR) less favourably than purely domestic matters. Unlawful deductions claims under ERA or NI ERO are "domestic matters". On that basis, applying the doctrine of equivalence, the NI WTR should be read as giving the police officers the same rights as their civilian colleagues have under NI ERO, so they too can benefit from being able to make a claim for a series of deductions.
On the question of what constitutes a series of deductions, the Court held that this will be decided on the circumstances of each case. In this case, even if there was a break of more than three months between deductions, there was a common fault factually linking all the deductions - they had been calculated by reference to basic pay. It was held that Bear Scotland was wrongly decided, and it has been overruled by the Court.
What impact will this judgment have in Great Britain?
The Supreme Court's judgment is equally applicable to claims for unlawful deductions of wages under ERA as it is to the Northern Irish legislation the case arose from. British tribunals will no longer be able to rely on the principle under Bear Scotland v Fulton to break a series of deductions. This means, as long as employment tribunals properly evaluate what amounts to a series of deductions as having some unifying common fault, then a break of three months will not interrupt the series. This will apply to any unlawful deduction, not just holiday pay.
However, because of the terms of the Limitation Regulations the liability of employers in Great Britain will be limited to a maximum of two years. While this should prevent the type of financial issue the Police Service are facing in Northern Ireland (having lost the case their liability is now estimated at over £30 million - a liability that would be catastrophic to many businesses) it will still lead to higher value claims. And while the Limitation Regulations are currently in place, they have been challenged before and may well be challenged again. For that reason any employer (in GB or NI) at risk of this type of claim should take action to mitigate their potentially liabilities immediately.
What should employers be doing?
There has been plenty of warning about the risk of back dated holiday pay claims in recent years - primarily stemming from the various cases whereby it became clear that holiday pay needed to be calculated by reference to "normal" and not "basic" pay. Employers that did not react to the news that holiday pay should include regular allowances, overtime and commission (particularly if they are in Northern Ireland) will be significantly at risk.
Employers should ensure they are paying holiday pay correctly (on the basis of normal not basic pay). If they have not been, then advice should be taken with a view to deciding how to rectify the position. Although the Supreme Court judgment means that a break of three months or more in deductions will not interrupt a series, claimants will still need to comply with the usual statutory time limit for presenting these claims to tribunals - usually within three months of the last deduction (subject to extension for Acas conciliation). So if workers are paid correctly from today onwards the clock on the time limit for making a claim will have started ticking.
Other matters addressed by the Supreme Court
Although the focus of this case related to the issues of the three month break in deductions and whether the police officers would be able to benefit from making a claim for series of deductions, the Supreme Court also set out some guidance on related matters. Firstly, the Court said that when calculating the daily rate of normal pay it is not appropriate to just use calendar days in a year. What constitutes normal remuneration is a question of fact in each case.
Secondly, the Court said that no distinction should be drawn between the four weeks EU leave and the additional 1.6 weeks leave required by domestic legislation when considering the order in which holidays are taken. Rather, each day's leave will be a composite of the total leave entitlement. While this seems logical, given the different rules on calculation and carry forward of these different entitlements, it currently only serves to make the correct calculation of holiday even more complex.
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