Holiday pay claims unlocked – the Supreme Court overturns the three-month break rule

The Supreme Court has published a long-awaited judgment overturning the three-month break rule which has been used to limit holiday pay (and other unlawful deductions of wages) claims since late 2014. The decision is the latest in a long line of important holiday pay cases and could have significant ramifications for some employers, particularly those with workers in Northern Ireland. In this update, we have picked out the Court’s key findings and focussed in on the key practical takeaways for employers.

What was the case about?

Over 3,300 police officers and 350 civilian employees brought claims against the Police Service of Northern Ireland (PSNI) for unlawful deductions from wages and underpayment of holiday pay. Holiday pay had been calculated based on the claimants’ basic pay only, and had not taken into account any additional elements of pay that were regularly received by the claimants, such as overtime. In line with the principles established in a series of EU and UK cases which require that workers receive their ‘normal pay’ when on annual leave, regular overtime and certain other allowances should have been included in the claimants’ holiday pay. The PSNI accepted this, and it was not therefore in dispute in the Supreme Court that the claimants had been underpaid.

What was in dispute was how far back the claimants’ claims for underpaid holiday pay could go. A number of different arguments were raised by the parties but the arguments of most relevance to other employers related to the meaning of a ‘series’ where a claimant brings a claim for a series of underpayments. In particular, the PSNI argued that a series of deductions from wages would be broken by a gap of three or more months between deductions and/or a lawful payment having been made.

The two-year backstop that limits unlawful deduction from wages claims in Great Britain was not in issue in this case, as it does not apply in Northern Ireland.

What did the Supreme Court decide?

The Supreme Court made a number of important findings on what is meant by a ‘series’ for the purposes of a series of unlawful deductions from wages. Upholding the decision of the Northern Ireland Court of Appeal (NICA), the Court held that:

• a gap of three or more months between deductions will not automatically break a series of deductions or bring that series to an end. This overturned the so called ‘three-month break rule’, which was established in the 2014 case of Bear Scotland Limited v Fulton and had significantly limited the scope of claims for historic underpayments for holiday pay (and other payments). Removing the three-month break rule means that, even when there has been a three-month gap between underpayments of holiday pay, a claimant may still be able to claim for those ‘pre-gap’ underpayments if they form part of a series of deductions.

• a series of deductions will not necessarily be broken when a lawful payment is made in the middle of that series. Whether a lawful payment interrupts the series will depend on the particular circumstances in each case, which will include the reason for the deductions and how that reason links with the lawful payment that has been made.

• it is a question of fact in each case whether a deduction forms part of a series. To work out whether several deductions constitute a series of deductions, a tribunal will need to consider all relevant circumstances, including the frequency, size and impact of the deductions, the similarities between them, and what links them together. In particular, a tribunal needs to work out what common ‘fault’ underpins those deductions. In the Agnew case, the common fault that linked the underpayments was the calculation of holiday pay at the rate of basic pay, rather than normal pay. The Supreme Court upheld the NICA’s finding that this method of calculation linked all payments of holiday pay in this case, and that it did so consistently from 1998.

These findings on the meaning of a series were the real crux of the decision in Agnew but the Court also provided decisions on other issues that had been raised in the case. This included the following:

• The Court touched on the different ‘pots’ of annual leave that UK employees are entitled to – namely ‘Euro Leave’ (the four weeks’ leave derived from EU law), additional UK leave (the additional 1.6 weeks’ leave provided for under UK law) and contractual leave – and whether those types of leave must be taken in a particular order in each holiday year. The PSNI argued that Euro Leave was taken first, then additional UK leave and then contractual leave. The Supreme Court determined that there is no legal rule that requires different types of leave to be taken in a particular order. This means that a worker’s Euro Leave is not automatically the first four weeks’ leave taken each year. Instead, where it is not practical to distinguish between the types of leave, each day of leave taken is made up of a mix of all three pots of leave.

• The Court also considered whether or not the police officer claimants were eligible to bring claims for a series of underpayments. The PSNI argued that the police officers were not eligible to bring claims for a series of deductions and so their claims were limited to any deductions made in the three months prior to them issuing their claim, as that is, on the face of it, what is set out under the Working Time Regulations (Northern Ireland) (“NI Working Time Regs”). Rather than consider whether police officers were eligible to bring claims for a series of deductions under Northern Ireland’s unlawful deduction legislation, the Court relied on EU principles to interpret the NI Working Time Regs in a way to provide equivalent rights to the police officers by enabling them to bring a claim for a series of underpayments under those regulations. As a typical worker (like the civilian employees in this case) will usually be able to bring claims under either the relevant working time or unlawful deductions legislation, this finding will not be relevant to the typical employer but some employers (particularly in the public sector) will be interested in the principle behind the Court’s finding as it could impact on the remedies available to individuals in certain roles or office holders whose employment rights are different to the typical worker.

What does this mean for employers?

Unlike the previous decision of the Northern Ireland Court of Appeal, the Supreme Court’s decision is binding on the whole of the UK. But the impact of the case is different in Northern Ireland, and the remainder of the UK:

1. Great Britain (England, Wales and Scotland)

The three-month break rule has been on shaky ground in Great Britain for a while now, particularly following non-binding comments made by the Court of Appeal in the Pimlico Plumbers v Smith case from last year. Having said that, until last week’s decision, the rule remained binding on tribunals in Great Britain. The Supreme Court’s decision therefore represents a significant change to unlawful deduction claims in Great Britain. Although holiday pay claims are perhaps the most common of these types of claims, the analysis of what is meant by a series would be equally relevant to all unlawful deduction claims so this decision has a broader impact outside of the holiday pay sphere.

An important point to note is that, for holiday pay claims, the impact of the decision is tempered by the “two-year backstop” which was introduced in Great Britain in 2015 shortly after the Bear Scotland decision came out. This backstop applies to a range of unlawful deduction claims, including claims relating to holiday pay, and means that those claims are limited to two years’ worth of losses dating back from the date on which the claimant presents their claim. This backstop provides employers with greater certainty over the extent of any liabilities for unlawful deductions claims, notwithstanding the fact that the three-month break rule has now gone. 

2. Northern Ireland

Northern Ireland does not have an equivalent to the two-year backstop, so the Supreme Court’s decision will be more keenly felt by employers with workers based in Northern Ireland. Although the decision of the NICA already meant that the three-month break rule was not valid in Northern Ireland, some employers may have been waiting on the Supreme Court’s decision in case it reinstated the rule. The Supreme Court’s decision now provides clarity in this area and means that a series of deductions for underpaid holiday pay for workers based in Northern Ireland could stretch back to the start of the worker’s engagement or, for long-standing staff, potentially as far back as 1998, when working time legislation came into force.

Some employers will also be affected by existing claims for historic underpayments of holiday pay that have been stayed pending the decision of the Supreme Court. Given the decision is the end of the line for this piece of litigation, stays are likely to be lifted soon and employers will need to decide what steps they want to take to defend those claims or potentially negotiate with the affected employees or unions on the best way forward.

The question relating to the order of leave was primarily relevant in this case to determining when a three-month break occurred, which is now a moot point in light of the Court’s decision to overturn the three-month break rule. However, it does have wider implications as those pots of leave are treated differently in various ways, including when it comes to carry-over and pay, and how holiday interacts with sickness absence. The Court’s conclusion that each day of leave could be a composite of the different pots of leave therefore creates some uncertainty in these areas. If you distinguish between different types of leave in how you treat or pay holiday, then you should review your contracts of employment, policies and time & attendance systems to see if you can more clearly set out which days of holiday relate to each pot of leave.

What next?

The majority of employers will already have addressed their holiday pay calculations in recent years to ensure that workers receive normal pay, rather than basic pay – the Supreme Court’s decision should have relatively limited impact on those employers, assuming that the calculations that they have put in place are correct. If your organisation continues to pay holiday pay at the rate of basic pay only and has not recently audited those arrangements, you should consider carrying out an audit of holiday pay arrangements to check whether any workers regularly receive other types of payment (such as overtime or allowances) that ought to be included in holiday pay. If they do, you will then need to consider how to address this with your workforce. This will be particularly important for employers with workers based in Northern Ireland given the lack of a two-year backstop affecting those workers.

All employers should have a watching brief on this area in any event as the government has proposed potentially significant changes to holiday entitlement and holiday pay as part of a consultation launched earlier this year. The proposed reforms include a proposal to combine Euro Leave and additional UK leave to make one single pot of annual leave, and an accompanying proposal to change holiday pay rules to ensure that all of that single pot of leave is paid at the same rate. The consultation closed in July and the government’s response is awaited. It remains to be seen what reforms the government will look to implement, and whether there is enough parliamentary time before the next general election for new legislation on such a technical area to be drafted and passed through parliament. For more thoughts on the potential impact of these reforms, check out our article from May this year – Beyond Brexit – the government announces potentially significant employment law reforms (burges-salmon.com).

How we can help

We have extensive experience of advising businesses on their holiday pay arrangements. If you would like more information on the above, or specific advice, please contact Luke Bowery or another member of our Employment team.

Disclaimer

This briefing gives general information only and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, you should not rely on it as legal advice. We do not accept any liability to anyone who does rely on its content.