In Chief Constable of the Police Service of Northern Ireland v Agnew, the Supreme Court (SC) has confirmed that workers who have been underpaid holiday pay over a period of time are not prevented from recovering underpayments occurring prior to either a gap of three months in underpayments or a payment on one occasion of their full holiday pay entitlement. Previously, the applicable rules on time limits for bringing holiday pay claims had been interpreted to mean that the expiry of three months from an underpayment or a full payment of holiday pay broke a series of deductions (i.e., underpayments) with the consequence that prior underpayments could not be recovered under the relevant employment legislation.
Workers who have been underpaid holiday pay can bring a claim either under the Working Time Regulations 1998 (WTR) or for unauthorised deductions from wages under the Employment Rights Act 1996 (ERA). In principle, a claim under the WTR must be brought within three months of the underpayment. However, a claim for unauthorised deductions from wages can be brought in respect of a ‘series’ of deductions (i.e., underpayments), in which case the time limit for bringing a claim runs from the last underpayment in the series. This enables workers to bring claims for underpayment of holiday pay covering potentially extensive periods of employment. However, previous English case law had held that, where a series of deductions was broken by a gap of three months or more, or by a lawful payment, the employee could not claim underpayments occurring prior to that gap or lawful payment.
In Agnew, police officers in Northern Ireland brought claims for underpayment of holiday pay on the basis that their holiday pay had been calculated by reference to basic salary only and did not include overtime. It is now settled law that holiday pay must be calculated by reference to ‘normal remuneration’ which should include not only basic salary but also other regular payments such as overtime and commission. When calculating holiday pay, an employer should generally look back over a reference period of 52 weeks in order to calculate an average figure for ‘normal remuneration’ which is a fair representation of the remuneration which the worker would have received had they been at work. In Agnew the parties agreed that the holiday pay had been calculated incorrectly – the question was how far back the employees could claim.
The SC agreed that the question of what constitutes a ‘series’ of deductions for these purposes is essentially a question of fact and that all relevant circumstances should be taken into account. These include the frequency, size, and impact of the underpayments, how they came to be made and applied, and what links them together. It is not necessary to have an unbroken line of underpayments, although this may be a relevant factor in determining whether there is a series of deductions for these purposes.
The SC indicated that it is also helpful to identify the underlying fault causing the underpayments. In this case, the cause of the underpayments was the calculation of holiday pay by reference to basic pay not ‘normal remuneration.’ Some payments may by chance have been correct (and therefore lawful) because, for example, the employee did not work any overtime for a period and so ‘normal remuneration’ was at that time the same as basic pay. However, this did not, as had previously been suggested, break the series of deductions and prevent the employee from claiming underpayments from before that break.
In this particular case it was clear that each unlawful underpayment of holiday pay was factually linked to its predecessor by the common fault that holiday pay was being incorrectly calculated by reference to basic pay. This created an unbroken series of underpayments going back to 1998. It did not matter that the interval between these payments was sometimes more than three months. The previous suggestion that an interval of more than three months would break the series of deductions was an incorrect interpretation of the relevant statutory provisions.
The SC also rejected previous decisions which suggested that, when employees take holiday, they should be deemed to take the four weeks of holiday granted by the EU Working Time Directive (WTD) first, and only when that is exhausted take any additional statutory or contractual holiday (which can be paid at the rate of basic pay rather than ‘normal remuneration’). The SC said that annual leave days should be viewed as a ‘composite whole’ – there was no need to take leave from different sources in a particular order. Previous cases had found that since WTD leave would be deemed to be taken first, when additional leave was taken and paid correctly, this broke the series of underpayments. However given the decision in Agnew that a series of underpayments will not be broken by a lawful payment or a gap in time, this point is now of limited relevance.
In practice, the effect of this decision is limited in England, Wales, and Scotland, at least for the time being, on the basis of the current legal position. This is because, in response to concerns about the impact on businesses potentially facing large claims for backdated holiday pay, the UK government adopted the Deduction from Wages (Limitation) Regulations 2014, which limit claims for backdated holiday pay to deductions made during the two-year period preceding the claim. These regulations do not apply in Northern Ireland.
Takeaway: The Agnew case is relevant to employers, or purchasers of businesses, which may face contingent liabilities where holiday pay has been calculated on the basis of basic salary only. If purchasers do identify this type of issue during due diligence, they should seek an appropriate warranty or indemnity cover. To avoid issues in the future, if they have not done so already, employers and purchasers would be advised to check that their calculation of holiday pay is in line with current case law and includes any additional normal remuneration such as overtime and commission.
