Mind the Gap – an important holiday pay decision

In the case of 'Chief Constable of the Police Service of Northern Ireland v Agnew and others' more than 3,500 police officers and civilian staff employed by the Police Service of Northern Ireland brought claims for underpaid holiday in the Northern Ireland Employment Tribunal. See the case here.

The calculation of their holiday pay had not included compulsory overtime payments and it has been established by case law from Bear Scotland v Fulton onwards that such amounts should have been included in their holiday pay calculations. The total amount underpaid going back to 1998 when the Working Time Regulations took effect was estimated to be £30 million.

PSNI accepted that holiday pay had been underpaid, but the issue that has taken so long to determine is how far back such claims can go and whether claims could be made all the way back to 1998. This is because the claims were made as claims for unlawful deduction from wages. Such claims have to be made within three months of such deduction or, where there is a series of deductions, within three months of the last in such series.

Case law has established that a persistent failure to correctly pay holiday pay can be a series of deductions, but the English Employment Appeal Tribunal in Bear Scotland v Fulton established that a gap of more than three months between underpayments would break any such “series of deductions”. For many employers, this significantly mitigated the consequences of the cases that expanded the calculation of holiday pay because if for any particular employee, the employer could point to a three month period during which the individual either did not take any holiday or was paid correctly for holiday throughout that period, that gap in underpayments broke the series of deductions and any failure to pay holiday pay correctly prior to that gap could not be considered by the Tribunal.

This three-month gap principle was novel when introduced in Bear Scotland and has been subject to considerable discussion.

The holiday pay Agnew case has now considered the issue at the highest level: the UK Supreme Court.

The Supreme Court considered that the purpose of legislation preventing unlawful deductions from wages was to prevent the exploitation of workers. Whilst claims should be made within three months of a deduction, the provisions that allowed a claim to be brought within three months of the last of a series of deductions protected those workers who were exploited over a long period of time. The Supreme Court had sympathy for the argument that the three-month gap concept might permit a “canny operator” to game the system by spacing out underpayments.

The Supreme Court held that there was no basis for interpreting the legislation as meaning that a three-month gap between underpayments automatically broke a series of deductions. It considered that whether or not there is a series of deductions is a question of fact with the following factors to be taken into account: the similarities and differences between the deductions, their frequency, size and impact; how they came to be made an applied; what links them together, and all other relevant circumstances. The three-month gap was an artificial construct which did not reflect the purpose of the legislation.

There is no level of appeal against the Supreme Court’s decision, and so the position appears to have been definitively determined (unless the underlying legislation is changed).

In term of the consequences for employers, there are some important points to note:

• In Great Britain (but not in Northern Ireland), claims for unlawful deductions from wages cannot look back any further than two years.  This was introduced by the government following the Bear Scotland case to mitigate the consequences for employers who had been mistakenly underpaying holiday pay. That two year period remains for employers in Great Britain, so any series of deductions cannot go back further than two years.
• The decision may have an impact on holiday pay cases currently going through the Tribunal system as employers will no longer be able to run a three-month gap argument and will be reliant on either other grounds for arguing that there is no “series of deductions” or on the two year limit.
• The decision itself does not generate new claims for underpaid holiday.  If an employer is now correctly paying holiday pay and has not received a Tribunal claim within three months of the date of its last underpayment to its workers, this decision does not enable a new claim to be raised now.
• Whilst this case related to holiday pay, the principles in this case apply to any claim for unlawful deduction from wages.