In a landmark ruling, the Supreme Court has dismissed an appeal brought by the Police Service of Northern Ireland (PSNI) and upheld a decision of the Northern Ireland Court of Appeal (NICA) in respect of the proper calculation of holiday pay.
The impact of the decision is that potentially thousands of workers may be owed substantial back pay in respect of underpaid holiday pay. The estimated liability for the PSNI as a result of this decision is around £30 million, and the ruling has wider legal implications for employers across the whole of the UK.
The background to the case is that, for many years, the PSNI had (incorrectly) paid holiday pay to officers and civilian staff by reference to basic pay only, rather than their 'normal pay'. Their normal pay would have incorporated regularly worked overtime.
The key question for the SC was: were those underpayments of holiday pay based on basic pay part of a 'series' of deductions from pay?
Normally, a three month time limit applies for bringing a claim for underpaid wages but this can be extended if the last underpayment is one of a 'series' of underpayments.
Original findings by the Industrial Tribunal (IT) that the decision in a 2015 Employment Appeal Tribunal case called Bear Scotland v Fulton was wrong, were upheld by the NICA: it agreed with the IT that a gap of three months or more between underpayments does not automatically break a 'series' of deductions for the purpose of the time limit for bringing a claim for holiday pay.
Affirming the decision of the NICA, the SC has held that the existence of a 'series' should be assessed on a case-by-case basis and should not be automatically broken by a three-month gap. This would include gaps relating to absences for maternity leave, maternity and disability related illnesses or occasions where an individual has not taken annual leave for a period exceeding 3 months.
Furthermore, the SC have also confirmed that a series is not ended by a lawful payment.
The SC held that each payment in a series must be "factually linked to its predecessor by the common fault or unifying vice" i.e.in order to be counted as a 'series' for the purpose of extending the normal 3 month time limit, each payment in a series must have been calculated on the same incorrect basis. In this case, that was a miscalculation by reference to basic pay rather than normal pay.
Impact going forward
The SC's decision will have legal and costs implications for all UK employers, making it easier for workers to claim for historic underpayments of holiday pay. However, the decision will undoubtedly have more significant ramifications for employers in Northern Ireland, where there is no equivalent to the GB two year 'back stop' legislation which limits unlawful deductions claims to two years' from the date a claim is lodged.
This means, in theory, that some workers in Northern Ireland could seek to recover underpayments in respect of holiday pay as far back as the enactment of the Working Time Regulations 1998.
We also expect to see movement on holiday pay litigation in the Northern Ireland tribunal system. There are thousands of claims currently stayed pending this decision.
If employers have not already done so, we strongly advise that they conduct a review of their existing approach to holiday pay calculations and ensure that annual leave is calculated and paid by reference to normal remuneration, not 'basic pay'.
The full judgment in Chief Constable of the Police Service of Northern Ireland v Agnew is available here.
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