How far back can holiday pay claims go?

Supreme Court: 3-month gap will not break a series of unlawful deductions.

Holiday pay continues to prove a headache for employers, particularly for those with variable hours and part year workers, with the Supreme Court confirming last year in Harpur Trust v Brazel that part year workers, such as term time only staff who are contracted across the whole year, are entitled to the full 5.6 weeks’ statutory paid leave no matter how many weeks they work. See our article from August 2022 for details: Statutory minimum holiday pay cannot be pro-rated for part year staff. 

We are still awaiting the Government’s response to its Consultation on calculating holiday entitlement for part year and irregular hours workers which closed in March and seeks to bring holiday entitlements for term time only staff into line with full year part time workers.

A related area of uncertainty and concern for employers has been the extent of arrears which workers might be awarded in tribunal for underpaid holiday pay. We are often asked whether claims could be brought for alleged underpayments dating back to the start of employment.

Holiday pay claims for unlawful deductions from wages

Holiday pay claims are usually brought as claims for unlawful deductions from wages under the Employment Rights Act 1996. These claims must be brought within three months of the date of the underpayment. Where there is a series of deductions, the claim must be brought within three months of the last deduction in the series. This means that the three-month window for claims can re-open every time an incorrect payment is made. But the case law on what is meant by a “series” of deductions, and so how far back arrears can go, has been unclear for some time.

The Employment Appeal Tribunal in Bear Scotland Ltd v Fulton determined that a series of deductions would be broken by a gap of more than three months between unlawful deductions. However, subsequent cases suggested this decision was not correct.  

A recent case in the Supreme Court has now brought much needed clarity, confirming that a three-month gap will not of itself break a series of unlawful deductions. This decision potential increases the level of risk for employers, particularly those based in Northern Ireland.

Case details: Chief Constable of the Police Service of Northern Ireland (PSNI) and another v Agnew and others

3,380 police officers and 364 civilian staff in the PSNI brought claims for arrears of holiday pay stretching back to the date when the Working Time Regulations (Northern Ireland) 1998 (WTRNI) came into effect. Eight years after the first of these claims were brought, the Supreme Court has now confirmed that the claimants are entitled to considerable arrears dating back in some cases to 1998, which may amount to payouts totalling £30m.  

This judgment is a landmark ruling which applies across the UK, but it will have a very different impact depending on where employees are based. In Great Britain, the Deduction from Wages (Limitation) Regulations 2014 act to limit awards for holiday pay brought under an unlawful deduction from wages claim to a maximum of two years before the date the claim was brought. In Northern Ireland there is no such statutory limit and such claims arising from the WTRNI can go back as far as 1998.

What is included in holiday pay?

The arrears in this case arose as the claimants were paid only basic pay when they took annual leave. European Court of Justice and UK case law made clear some years ago that pay during the four weeks’ minimum leave under the European Working Time Directive should be based on “normal remuneration” rather than basic pay. This was in order to ensure that workers are not disincentivised from taking their leave, thus risking their health and wellbeing. In other words, it should include any regular payments over and above basic pay which are linked intrinsically to the performance of tasks required to be carried out under the contract. This includes regular overtime, shift allowances and on-call payments.

What is a series of deductions?

The PSNI argued that the claimants should not be awarded arrears dating back many years as the series of underpayments had been broken by a gap of three months between unlawful deductions or by a correct and lawful payment (where the worker had not earned any additional remuneration in the relevant period and so was due only basic pay for their leave). Based on this argument, the PSNI sought to limit arrears to around £300,000.

When considering what was meant by a series of deductions, the Supreme Court agreed with the Court of Appeal that a “series” means a number of things of a kind which follow each other in time. Whether particular underpayments form a “series” is a question of fact for tribunals in each case, taking into account all relevant circumstances including the similarities and differences in the deductions; their frequency, size and impact; how they came to be made and applied; and what links them together.

In this case, the Supreme Court agreed that each unlawful deduction in relation to holiday pay was factually linked to the payment before by the “common fault or unifying vice” that holiday pay was calculated by reference to basic pay rather than normal pay. Intervals of more than three months did not in and of themselves break the series or bring it to an end. And the series was not broken or brought to an end by holiday payments which happened to be correct as these still had the “common fault or unifying vice” of being calculated by reference to basic pay rather than normal pay.

Quantifying the risk of holiday pay claims

PSNI v Agnew provides some much needed clarity on the extent of arrears which might be awarded in a claim for unlawful deduction from wages. Payments which include an element of holiday pay calculated on the same unlawful or incorrect basis will form a series, and there will be no break in the series where payments are separated by a gap of three months. Claims can be brought within three months of the date of the last incorrect payment.

In Northern Ireland, arrears might go back as far as 1998. In Great Britain, awards for such claims will be limited to two years from the date the claim is brought.

If they have not already done so, employers should undertake a review of the potential risk of claims for arrears of holiday pay, seeking specialist legal advice. This review should also take into account the risk of other potential claims relating to holiday pay where arrears can go back further, including breach of contract claims and claims under the Part Time Workers Regulations, where it is alleged that the rate of holiday accrual compared to full time workers was less favourable.

If you would like advice regarding a review of potential holiday pay risks and next steps, please contact Alacoque Marvin at alacoque.marvin@wrigleys.co.uk.