On 4 October, the Supreme Court handed down its long-awaited judgment in the case of Police Service of Northern Ireland v Agnew & Ors [2023]. Although a case initially brought in Northern Ireland, the Supreme Court’s decision is binding on the whole of the United Kingdom. It has significant implications for the calculation of holiday pay and the way holiday pay miscalculations are compensated by the courts and tribunals. 

Relevant legal principles

Holiday and holiday pay is a notoriously complex subject.  The rules of interpretation which give rise to the relevant legal principles we see today (many of which are engaged by this case) are derived from various domestic and European case law.  In order to understand the implications of this Judgment, therefore, it is necessary to understand these principles.  A brief summary is set out below:

1.  Workers are entitled to statutory leave of 28 days as follows:
    

• 20 days by virtue of the European Working Time Directive (‘WTD Leave’); and
• 8 additional days’ leave by virtue of the UK Working Time Regulations 1998 (‘Additional Leave’).
   

2. Different holiday pay calculations apply depending on whether the leave is WTD Leave or Additional Leave:
    

• WTD Leave holiday pay must be based on a worker’s ‘normal remuneration’ – i.e. basic pay plus all overtime, commission, standby/call out payments and some bonuses; however,
• Additional Leave is calculated as ‘a week’s pay for a week’s leave’ – i.e. basic pay only.
   

3. The deadline for bringing unpaid holiday claims is three months from the date of the last in the series of unlawful deductions.
    
4. Unpaid holiday pay cannot be claimed as the ‘last in a series of deductions’ where more than three months has elapsed between deductions (‘Series Extension’).
    
5. The different treatment in calculating holiday pay for WTD Leave and Additional Leave means that compliant payments in between unlawful payments break the ‘series of deductions’ in every holiday year as there will be a gap of more than three months between periods of non-compliant payments under the WTD.

Factual background

The Claimants in this case were police officers and civilian staff working for the Police Service of Northern Ireland (‘Police Service’).  Historically, their holiday pay had been calculated based on their basic pay rather than based on ‘normal remuneration’, and they lodged claims in the Northern Ireland Industrial Tribunal for arrears of holiday pay dating back to 1998.

Whilst the Police Service accepted that underpayments had been made, the issue in this case was how far back the Claimants could claim compensation.

The Police Service argued that a claim for underpayments should be limited to underpayments in the three months before the claim is brought.

The Claimants relied on the Series Extension provision, arguing that they should be able to claim underpayments that go back more than three months.

The issue to be decided by the Court of Appeal and, ultimately, the Supreme Court were:

1. whether the Claimants could rely on the Series Extension provision;
2.  if so, whether the series of payments from which deductions were made should necessarily end if two such payments are separated by a gap of more than three months or if a lawful payment is made in between; and 
3. whether holiday should be deemed to have been taken in a particular order.

Supreme Court decision

The Supreme Court dismissed the Police Service’s appeal and found in the Claimants’ favour.

They held that:

1. what constitutes a ‘series of deductions’ is a question of fact for which all relevant circumstances need to be taken into account – frequency, size, how they came to be made etc. 
2. the deductions do not need to be a contiguous sequence; 
3. there only needs to be a factual link between the unlawful deductions – i.e. a common fault or vice (in this case, the fact that holiday pay was calculated by reference to basic pay rather than normal pay was enough to link the payments together) and thus, the making of a lawful payment within the series would not necessarily interrupt the series;
4. there was no requirement to take WTD Leave and Additional Leave in a particular order;
5. the appropriate reference period is a question of fact in each case but the Supreme Court encouraged parties to use a 12 month reference period.

Implications

The ruling overturns the current position which enabled employers to limit their liability by: encouraging workers to take long gaps between holidays; “topping up” holiday pay on a regular basis; and/or by stipulating which type of statutory holiday is deemed to be taken first.  

It clarifies that, even where lawful holiday payments are intermittently made to workers, if the employer continues to calculate holiday in the same way, making the same type of underpayment on a regular basis (regardless of whether the payment is more or less than three months since the last lawful or unlawful payment), the deductions will still be potentially linked as a “series”.  
Whilst this ruling is significant, it is less significant for England, Wales and Scotland than it is for Northern Ireland since, in these countries, unlawful deductions from wages claims are subject to a two year ‘backstop’.  Even so, depending on the size of the employer, the decision could still result in significant compensation payments being made to a workforce for the limited, two year, period.  

It also potentially paves the way for other types of deductions, which may be irregular but largely outside of the worker’s control, to be linked as a ‘series’ (e.g sick pay, commission payments).

Advice for employers

In situations such as these, forewarned is forearmed. Our advice is for employers to:

• audit the way holiday (and other) payments are calculated to ensure they comply with the relevant legal principles;
• review historic holiday records to identify any potential claims;
• calculate the worst-case financial liability;
• work out a viable and affordable repayment plan; and
• put appropriate mechanisms in place to ensure lawful calculation of holiday pay in the future.