In more detail

In Chief Constable of the Police Service of Northern Ireland v. Agnew and others, the Supreme Court had to consider the period for which the employing police force was liable to compensate multiple claimants for underpaid holidays. It was accepted that underpayments had occurred because the employer had only paid basic pay for holidays rather than "normal" pay. However, the duration of the backpay period was disputed. The court found in the claimants' favour, meaning that liability could potentially extend back in some cases to 1998. The estimated value of the claims is GBP 30 million. 

It should be noted that in England, Wales, and Scotland, a backstop of two years exists, unlike in Northern Ireland. Nevertheless, the case still has implications for the whole UK for the reasons explained below.

Background

A claim for an underpaid holiday must be brought within three months of the underpayment, technically referred to as a deduction. However, where there has been a series of deductions, the time limit only starts to run from the date of the last in the series. In Chief Constable of the Police Service of Northern Ireland v. Agnew and others, two key issues arose concerning how a series of deductions might be broken.

The first issue arose from the EAT's 2014 decision in Bear Scotland v. Fulton. This said, amongst other things, a series of deductions will be broken if there is a gap of three months or more between deductions. That aspect of the judgment has been doubted for some time. 

The second issue concerned the different sources of holiday entitlement and whether a worker is treated as taking those entitlements sequentially or whether each day of the holiday is treated as a composite of the different entitlements. By way of reminder, the entitlements are:

• Four weeks' statutory holiday entitlement under retained EU law ("Euro leave"). Case law has established that a worker is entitled to normal pay for this holiday. This means that things like compulsory, guaranteed, and regular voluntary overtime need to be factored in, as well as commission.
• 1.6 weeks' additional entitlement under purely domestic UK law ("Additional leave"). The worker is entitled to receive a week's pay (or the relevant daily fraction) for each week of this holiday, as defined in the Employment Rights Act 1996. This is sometimes less than normal pay.
• Any further entitlement under the worker's contract of employment ("Contractual leave"). Pay for this is determined by the contract.

The Police Service of Northern Ireland only paid basic pay for holidays. This was potentially the correct entitlement for additional leave and contractual leave. They contended that the law treats workers as taking holiday sequentially: Euro leave first, then additional leave, then any remaining contractual entitlement. If correct, there was an argument that even though Euro leave was being underpaid, once that leave was exhausted, it was followed by correctly paid additional and contractual leave, thereby breaking the series of deductions. 

Decision

The Supreme Court decided that the three-month gap rule from Bear Scotland v. Fulton was wrong. In deciding whether deductions/underpayments are linked as a series, all relevant circumstances have to be considered. This could include the similarities and differences, the frequency, size, and impact, how they came to be made and applied, and what links them together. Expanding on this last point, the court emphasised that it is both important and helpful to identify the fault that is said to underpin the alleged series of deductions. In this case, the underpinning fault was that the employer paid basic pay only for holidays. The court also decided that the alleged underpayments do not have to be part of a contiguous sequence of the same kind. In short, the fact that a lawful payment is made does not automatically break a series; the underpayments on either side of the lawful payment could potentially still be linked as a series.

Having decided that the three-month rule does not apply and explained what amounts to a series of deductions, the court considered that the issue of whether a holiday is taken sequentially or is a composite of the different sources of entitlement was largely redundant. However, it concluded that if and insofar as it is not practicable to distinguish between different types of leave, then all the leave is a composite whole. It did not explain what the phrase "not practicable" meant in this context.

Comment

The decision in relation to the three-month rule is unsurprising. While its impact is particularly significant in Northern Ireland, it is much mitigated by the statutory two-year backstop on deductions claims that apply in Great Britain. This being said, the court's comments about what, in fact, amounts to a series seem likely to lead to yet more confusion and corresponding litigation. 

However, the finding that Euro, additional and contractual leave all constitute one composite entitlement if it is "not practicable" to distinguish between those types of leave presents employers with a major continuing problem. As explained above, holiday pay for these different entitlements is calculated differently. If each day of leave is made up of a composite of those entitlements, it is technically impossible for an employer to calculate holiday pay unless it knows at the beginning of the holiday year exactly how many days of the holiday will be taken that year. In practice, this means employers may simply have to over-pay by using the most generous of the three calculations. That is a problem that has needed fixing for some years now, and it still needs fixing.

One possible solution would be to amend policies and template contracts of employment to say that holidays will be deemed to be taken sequentially. The court's decision does not expressly deal with this, but it might be considered practicable to make the distinction in a context where the contract spells out how the sequence applies. 

Some employers might not have the processes to apply different rules for holiday pay calculation depending on whether the day off is considered Euro, additional, or contractual leave. Nevertheless, there is still a benefit in updating contracts and policies as suggested because of the sometimes complicated rules around the carry-over of holidays. The suggested updates would make it clear that Euro leave has been taken if the worker has at least taken four weeks' holiday in the relevant holiday year. 

Finally, it should be noted that the government is proposing amendments to the rules on holidays. The full details of its plans have yet to be published, and it remains to be seen whether they will supersede the Supreme Court's decision in any way.