Supreme Court in Agnew increases employers’ potential liability for underpaid holiday pay

At a glance

• The Supreme Court has handed down judgment today in Chief Constable of the Police Service of Northern Ireland and another v Agnew and others (Agnew).
• The judgment has significant implications for liability for underpaid holiday pay for employers, although its impact in Great Britain is mitigated by the legislation which created a two-year backstop for such claims.

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The claimants in Agnew were lead claimants selected from 3,380 police constables and 364 civilian employees of the Police Service of Northern Ireland who brought claims for underpaid holiday pay. They regularly worked overtime, but were paid only basic pay as holiday pay. This approach has been established by a line of case law starting with the decision of the ECJ in Williams v British Airways to be incompatible with the Working Time Directive. That case, and the decision of the EAT in Bear Scotland, established that holiday pay should be calculated by reference to a worker’s normal pay, including an element to reflect overtime usually worked.

It was therefore common ground between the parties that the claimants had been underpaid; the issue was the period for which they were entitled to back pay. The time limit for bringing claims for underpaid holiday is three months. The claimants relied on a provision which would allow them to claim all underpayments arising from a series of payments (the Series Extension), provided that the last underpayment was not more than three months before the claim was brought.

The Industrial Tribunal held that the claimants could rely on the Series Extension and that most, if not all, the underpayments were in the series. The Court of Appeal dismissed the appeal. The Supreme Court also dismissed the appeal.

In common with the rest of the UK, annual leave entitlement in NI can be split into two kinds; four weeks’ leave under the Working Time Directive (WTD Leave) and an additional 1.6 weeks under the domestic legislation. It was common ground that the entitlement to normal pay which reflects overtime worked only applies to WTD Leave. For the additional leave, therefore, there was no underpayment as the domestic legislation only entitles workers to receive basic pay for that leave.

The main issues in the appeal concerned the scope and operation of the Series Extension, namely the meaning of ‘series’ for these purposes and whether a series of deductions comes to an end if either two such underpayments are separated by a gap or more than three months or if a lawful payment is made between them.

Series of deductions

The Supreme Court agreed with the Court of Appeal that:

• Whether there has been a series of deductions is a question of fact;
• A series of deductions can be constituted by deductions with a sufficient frequency of repetition but at different time intervals and in different amounts;
• A contiguous sequence of deductions is not a requirement; but
• There must be sufficient similarity of subject matter between each of the deductions in a series such that they are linked by a common fault of unifying or central vice (here, the calculation of holiday pay by reference to basic pay rather than normal pay).

‘Breaking the chain’ in a series of deductions

The EAT in Bear Scotland came to the surprising conclusion that a series of unlawful deductions would be broken where there was an interval of more than three months between deductions. The Supreme Court in Agnew did not agree.

The Supreme Court also held that a series of deductions is not necessarily broken by a lawful payment. All will depend on the nature and reason for the deductions and whether and how any lawful payment has anything to do with them. The Supreme Court agreed with the Court of Appeal in this case that the series was not broken or ended by any correct and lawful payment of holiday pay in so far as that payment came about due the the application of the common fault or vice that holiday pay was calculated by reference to basic pay rather than normal pay.

Remaining issues

The remaining issues before the Supreme Court were whether the annual leave must be taken or deemed to have been taken in a particular order or sequence; how overtime should be taken into account in calculating normal pay; and how the appropriate reference period for calculating normal pay should be identified.

The importance of determining what type of leave (i.e. WTD or additional) is taken when was significantly diminished by the Court’s findings in respect of breaking the chain. However, the Supreme Court agreed with the Court of Appeal that there is no requirement as a matter of law that leave derived from different sources must be taken in a particular order.

The Supreme Court also agreed with the Court of Appeal that when calculating a daily rate for overtime that forms part of normal pay the number of days in the four-week WTD Leave period should be divided by the number of working days in that period.

The Supreme Court concluded that the appropriate reference period for the calculation of holiday pay is a matter of fact. In this case, the Court of Appeal encouraged the parties to adopt a 12-month reference period.

Impact of the decision in Agnew

The decision of the Supreme Court has the potential to significantly increase employers’ exposure to claims for underpaid holiday as it removes (in most cases) the potential for successfully arguing that the series of deductions has been broken, either by the three-month rule or the making of a lawful payment.

The impact is less serious in Great Britain than NI, however, due to the legislation which was passed to limit the effect of the holiday pay cases. The Deduction from Wages (Limitation) Regulations 2014 inserted new provisions into the time limits for bringing an unauthorised deductions claim which in effect place a two year backstop on claims for underpaid holiday (and other deductions); the Series Extension only applies to underpayments within a two year period ending when the claim was presented. Those Regulations were not extended to NI.