The Supreme Court has held that police officers and other employees of the Police Service of Northern Ireland are entitled to bring a claim for a series of underpaid holiday entitlement (their holiday pay had not included overtime and certain allowances). The Supreme Court has also held that a gap of three months between underpayments of holiday pay does not automatically break the chain of a series of deductions and neither does a correct payment.

This decision puts holiday pay back in the spotlight and potentially increases the financial exposure for employers who have not calculated holiday pay correctly. It is likely to cost the Police Service of Northern Ireland £30-40 million as back pay for holiday pay claims and is also likely to have significant implications for employers in Northern Ireland and Great Britain. Employers in Great Britain, however, are in a better position, because there’s a two-year limit on how far back holiday pay claims can go.

The ruling is particularly significant for employers that did not increase holiday pay in response to various European Court of Justice decisions. Those decisions ruled that holiday pay needed to include regular allowances, overtime and commission. Many employers changed the way in which they calculated holiday pay as a result. Those that did not do so (and are, for example, still calculating holiday pay on basic pay only) may now face greater liability - especially in Northern Ireland where there’s no two-year limit to claims in place.

The ruling also has some wider implications First, it means that the “three month gap” rule can’t be used by employers in claims about any kind of underpayment (not just holiday pay) so workers can make claims for historic deductions no matter how far apart as long as there’s some common fault. Second, the Supreme Court has also ruled that holiday is not necessarily disaggregated into Working Time Directive leave, UK statutory leave and contractual leave. The default position is that each day’s leave is a composite of all three. This adds complexity because different rules about carry forward and pay apply to the different types of leave.

Supreme Court decision

Police officers and civilian employees of the Police Service of Northern Ireland (PSNI) had, since the introduction of the Working Time Regulations in Northern Ireland in 1998 (WTR), been paid their basic pay while on annual leave, i.e. their salary without regard to overtime and various allowances. According to European case law, they should have been paid their “normal pay” during the four weeks annual leave provided by the EU Working Time Directive, which included overtime and such allowances.

The PSNI accepted this. The question, however, was how many years back their claims for holiday pay could go and whether underpayments were broken by a three month gap in the series of deductions.

The Supreme Court pointed out that the WTR provide that claims can only be brought in respect of the three months prior to the date of claim. However, the Employment Rights (NI) Order 1996 (ERO) allows claims for underpayments to be brought within three months of the last in the series of deductions (series extension). This allowed claims to go back much further.

The PSNI argued that the police officers could not avail themselves of the protection of the unlawful deduction from wages provisions of the ERO. The Supreme Court disagreed (agreeing with the earlier decision of the Northern Ireland Court of Appeal), holding that the EU principle of equivalence means that national rules must not be less favourable than domestic rights, meaning that the police officer claimants could claim under ERO.

The next issue that arose was the correct interpretation of the series extension and whether a gap of more than three months in making unlawful deductions or the making of a correct payment meant that the series was broken. The Supreme Court upheld the Court of Appeal’s previous interpretation, noting that the aim of the legislation was to protect workers against exploitation. What constitutes a series of deductions is a question of fact and that “all relevant circumstances must be taken into account, including, in relation to the deductions in issue: their similarities and differences; their frequency, size and impact; how they came to be made and applied; what links them together, and all other relevant circumstances”. In this case, the series was linked by the “common fault or unifying or central vice” of the employer in paying holiday pay based on basic pay. Therefore, the appeal was dismissed.

The Supreme Court also upheld the Court of Appeal’s view that different types of leave (i.e. EU entitlements, statutory entitlements and extra contractual entitlements) are not necessarily taken in sequence and that, if it’s not practical to distinguish between them, all the leave to which a worker is entitled forms part of a single composite pot. This is discussed in more detail below.

What are the implications for employers?

The employer’s potential exposure in Agnew itself is a case in point: the case involved 3,380 police officers holding the office of constable and 364 civilian employees of the PSNI and it has been estimated that the decision could cost the PSNI in the region of £30-40 million. The case also has potentially significant consequences for other employers in Northern Ireland as it is believed there may be tens of thousands of holiday pay cases stayed pending the outcome of this judgment.

It is important to recognise, however, that not all employers are necessarily liable for holiday back pay. This liability only arises where employers have been underpaying holidays, for example by calculating holiday pay by reference to basic pay only when they should have been factoring in allowances, overtime or commission etc. Many employers have been calculating holiday pay correctly, or at least aiming to do so. Those employers that have been underpaying holidays, however, now face greater liability. Workers can now make a claim for any underpayment in a series (i.e. where each deduction has a common fault) regardless of whether the deductions are more than three months apart or whether correct payments are made in between.

Liability for back pay in Great Britain

Importantly, however, in Great Britain, the Deduction from Wages (Limitation) Regulations 2014 (2014 Regulations) impose a two-year limit on unlawful deductions claims brought after 1 July 2015. These regulations were not introduced in Northern Ireland. The regulations have already been the subject of challenges (and may continue to come under attack), but they remain in place in Great Britain, limiting employer exposure to back pay claims.

Liability for back pay in Northern Ireland

There is no equivalent to the 2014 Regulations in Northern Ireland. This means that the impact on employers in Northern Ireland could potentially be much greater than for employers in Great Britain, with holiday pay liability potentially dating back to 1998 when the Working Time Regulations were introduced, or back to the date on which employees commenced employment, whichever is later.

Many private sector employers have been keeping abreast of the developments in this litigation and have already changed practices in terms of calculating holiday pay to include overtime and various allowances calculated over the correct reference period, even if they are potentially not calculating this 100% correctly. Consequently, this decision will likely be of low impact to these employers.

Other employers may have taken a ‘wait and see’ approach to this litigation. Alternatively, they may have been involved in protracted negotiations with unions about holiday pay, which may not have been resolved. These employers potentially face back pay claims dating back to 1998, or when employees started employment, if later.

Composite holiday

As explained above, workers have rights to three separate types of holiday: four weeks’ leave from the Working Time Directive, 1.6 weeks’ (GB or NI) statutory leave and then whatever extra contractual holiday entitlement (if any) the employer provides on top. In the Bear Scotland case, the court thought that, unless the employer directed otherwise, Working Time Directive leave would be treated as being used up first, then statutory leave, then any contractual leave. The Supreme Court has, however, pointed out that workers are likely to look at their annual leave entitlement as a composite whole and “if and insofar as it is not practicable to distinguish between different types of leave” then all the leave to which a worker is entitled forms part of a single composite pot. Exactly what is needed to draw this distinction – whether this is a question of contract or administration, for example – is not addressed in the judgment.

This idea of a composite pot is problematic because different rules apply to each type of leave. There are different rules on pay (as explained above, Working Time Directive leave must be paid at the rate of “normal remuneration” but that’s not the case for other types of leave). There are also different rules about rescheduling (for example Working Time Directive leave can be reclassified as sick leave if the worker falls sick while taking it but that’s not necessarily a legal requirement for other types of leave). If each day’s leave is to be treated as only partly Working Time Directive leave, then it only partly attracts these extra entitlements.

Those that do draw a distinction between different leave types may still be allowed to do so – the judgment doesn’t deal with this point. Many employers, however, choose not to draw any distinctions between the different types of leave, and this is certainly the most straightforward approach (especially given the post-Brexit reforms on the horizon – see below).

Post-Brexit reforms ahead – implications for employers

The government has published a consultation paper on proposed changes to holiday law within Great Britain after Brexit, which we have written about here. The proposals include potentially ironing out the distinctions between different types of leave and creating one single pot of leave entitlement. The government raised the possibility of a single rate of pay for all types of leave and has proposed that holiday pay calculations might be simplified by allowing employers the option of paying a 12.07% uplift on pay to cover holidays. This latest judgment makes legislative clarity and reform more urgent, but also demonstrates the urgent need for consideration of these issues by Stormont, as the proposed changes do not apply in Northern Ireland.

What should employers do now?

While the clocks can’t be turned back on how holiday has been calculated in the past, there are steps that employers in Northern Ireland can take now to both measure and potentially mitigate their exposure to back pay:

• Undertake an audit of holiday pay: assessing how holiday has been calculated in the past will be critical in understanding what could now be in scope of an unlawful deduction from wages claim.
• Pay correctly now: ensure that holiday pay is now calculated factoring in the pay that workers normally receive. That should include regular overtime and also commission. Whilst the courts have found that three months between deductions does not prevent them being part of a series, a claim must still be brought within three months of the last deduction. So correctly paying holiday going forward starts that count down. A slightly counter intuitive, but important distinction. In addition, if employees are happy that they are now being treated fairly, that is likely to limit dissatisfaction and appetite for a claim.

The judgment in the Chief Constable of the Police Service of Northern Ireland and another v Agnew and others is available here.