UK Supreme Court issues landmark decision on holiday pay calculation
This morning (4 October 2023), the UK Supreme Court delivered its much-anticipated judgment in the case of the Chief Constable of the PSNI and another (PSNI / Appellants) v Agnew and Others (Respondents) [2023] UKSC 33 (“Agnew”). The Supreme Court’s judgment has ended the long running legal discourse about holiday pay calculations brought to the fore in the ‘Bear Scotland’ case.
Issues before the Supreme Court
The two pertinent issues for the Supreme Court to determine were:
- whether the Respondents could claim for underpayments made as part of a “series” of payments for holiday pay under Article 55 of the Employment Rights (Northern Ireland) Order 1996 (“ERO”), provided that the last underpayment was not made more than three months prior to their claim being lodged and
- if a “series” could be broken by either a gap of three months or by making one lawful payment.
The PSNI maintained that the Respondents should not be permitted to lodge claims for a “series” of unlawful deductions from wages under Article 55(3)(a) of the ERO because they are not classified as “workers” for the purposes of the ERO, despite being so for the purposes of the Working Time Regulations (Northern Ireland) 2016 (“WTR”).
Summary of decision
The Supreme Court unanimously decided that the decision issued by the Northern Ireland Court of Appeal (and that of the tribunal at first instance) is to be upheld. This means that the Respondents are entitled to claim for underpayments of holiday pay made as far back as the later of their start date of employment or 1998, being the date that the WTR were first introduced. This is because the statutory two-year back stop for claims which is applicable in GB has not been implemented in NI to date.
The rationale of the Supreme Court is, that a “series” of underpayments cannot be broken if there is a “factual link” between the underpayments. In this instance, the common fault in each payment of holiday pay was the method of calculation i.e. basic pay only.
The Supreme Court took a pragmatic approach and confirmed that the Respondents could bring claims as part of a “series” because the purpose of Article 55(3)(a) of the ERO is akin to the rights conferred under the WTR. Therefore, the EU principle of “equivalence” applies. Practically, this means that rights conferred under the EU-derived WTR should not be more favourable than those under the ERO and should be ‘read in’ to the Northern Irish domestic legislation.
Impact of the decision for employers
The Supreme Court decision is binding across the UK which will largely align the position on holiday pay calculation and payment. However, this decision will have huge financial consequences for NI employers because NI does not have the statutory two-year ‘back-stop’ for claims brought for unlawful deductions from wages. Whilst of primary significance for NI-based employers, this will also impact any GB or US based organisations with employees located in NI.
Re-ignite media attention on holiday pay calculation
The Supreme Court’s decision has been eagerly anticipated, particularly in NI. As a result, the issue of holiday pay is likely to gain significant traction in the media once again. This will inevitably place the issue back on the radars of employees which could lead to an increase in:
- internal complaints or questions being raised about holiday pay practices and/or
- claims being lodged in the Industrial Tribunals in NI or the Employment Tribunals in GB
Increase in holiday pay litigation
Employers throughout the UK could see an increase in holiday claims being lodged, including for underpayments that employers might previously have assumed were out of time. In GB, these could extend back to two years and in NI, claims could potentially go as far back as the later of the worker’s start date of employment or 1998, when the WTR were first introduced in NI.
While the financial consequences of successful claims will be burdensome to employers across the UK, the financial impact will be much more profound for NI based employers who do not benefit from the two-year backstop.
What should employers do now?
Firstly, keep calm
For NI based employers, holiday pay calculation has been a highly litigious and widely reported issue in recent years meaning that many organisations have already carried out a review of their holiday pay practices.
For GB employers, the good news is that the Supreme Court’s judgment brings clarification to how holiday pay should be calculated, notably by confirming that the crucial factor in determining whether there is a “series” of deductions is the factual link between the payments.
What next?
Carry out a review of workforce remuneration
It will be essential for employers to be familiar with additional payments that their employees regularly receive such as overtime, allowances, shift premiums, performance-related bonuses, and/or commission payments.
This will enable an accurate assessment to be completed in respect of any potential underpayments made to those employees who receive remuneration above their ‘basic pay’.
Pro-actively identify instances of underpayments
Explore a sensible solution to rectify the situation with affected employees. If employers can be seen to be proactive, the risk of employee grievances and/or tribunal claims being lodged will be significantly mitigated.
Consider issuing a communication to staff
Management teams (particularly in larger organisations) should consider if they wish to issue a short communication to staff confirming that they are aware of the judgment and:
- that they are already paying holiday pay in the correct manner and will ensure that this continues to be the case should any further developments arise or
- they are carrying out a review of their existing holiday pay practices and will be in touch following the outcome of this process
Don’t be afraid to seek professional advice
Holiday pay calculation is a complex issue, not helped by the web of case law that has emerged in recent years. While the Supreme Court’s decision in Agnew brings clarification, there is a substantial amount of information for organisations to digest. If employers are concerned about the impact of the Supreme Court’s judgment and/or need further explanation, they should obtain independent legal advice.
For more information, please contact Gareth Walls, Partner, Aisling Byrne, Partner, Shirley Blair, Of Counsel, Rob Tubman, Senior Associate, Johanna Cunningham, Associate, or your usual Employment team contact.
Date published: 4 October 2023.