UK: Underlying Vice: What Can Amount To A Series Of Holiday Pay Unlawful Deductions?

Holiday pay: an area of employment litigation that just keeps on giving. On 4 October 2023, the Supreme Court handed down an important judgment on holiday pay underpayment back pay claims in Chief Constable of the Police Service of Northern Ireland and another v Agnew and others [2023] UKSC 33. The Supreme Court upheld the 2019 judgment of the Northern Irish Court of Appeal (NICA), which had challenged the then perceived wisdom on holiday underpayment back pay claims. In this article, we look at this important case in more detail and consider what this means for employers.

What did the Supreme Court conclude?

The Supreme Court has confirmed that:

1. Underpayment claims based on a series of deductions can be brought under the Working Time (Northern Ireland) Regulations 1998 (WTR (NI) 1998 and, by extension, under the corresponding Working Time Regulations 1998 (WTR 1998) as apply in Great Britain.
2. Where there is a series of deductions from holiday pay, how far back a series may potentially go is not broken merely by a gap of three months or more between deductions (the "Bear Scotland gap"). Rather, what constitutes a series is a question of fact that must be answered in light of all relevant circumstances. The question is just what is the "unifying vice" that links the series of deductions together?
3. There is no legal requirement that holiday derived from the Working Time Directive (WTD) (four weeks) and that derived under domestic regulations (1.6 weeks) must be taken in a particular order – it is a "composite whole".
4. Calculations for what should be included in holiday pay ought to be made using working days rather than calendar days in an appropriate reference period, which will be a question of fact.

Although this case originated in Northern Ireland, the Supreme Court judgment is also binding in Great Britain, bringing case law on historic holiday pay claims back into line across the United Kingdom.

Background

This case concerns claims by 3,380 police officers and 364 civilian employees working in Northern Ireland for unlawful deductions of wages (holiday pay).

Differing rules for calculating holiday pay

Under both the WTR (NI) 1998 and the WTR 1998 all workers are entitled to 5.6 weeks paid holiday leave. However, different rules in relation to what must be included in holiday pay and in relation to carry-over of leave apply to the four weeks' leave entitlement that derives from the WTD and the additional 1.6 weeks introduced by domestic legislation in 2009.

The now well established case law requiring holiday pay to be based on "normal pay", including overtime and other payments ''intrinsically linked to the performance of the tasks'', relates to the statutory annual leave entitlement derived from the WTD only - four weeks of leave. It does not strictly apply to the additional statutory annual leave entitlement of 1.6 weeks, or to any enhanced contractual entitlement which can lawfully be paid in many cases based only on basic salary.

The Police Service of Northern Ireland (PSNI) admitted that, since the implementation of the WTR (NI) 1998 on 23 November 1998, they have wrongly calculated holiday pay by reference to basic salary, instead of by "normal pay", including overtime for the four weeks of leave derived from the WTD.

Differing rules for back claims

Under both the WTR (NI) 1998 and the WTR 1998, claims for underpayments of holiday pay can be made provided the claim is brought within three months of the underpayment. There is no provision for claiming in respect of a series of underpayments going back longer than three months. The definition of "worker" in the WTR (NI) 1998 and WTR 1998 is wide, and explicitly includes police officers.

Workers in Northern Ireland can also claim for underpaid holiday pay under the unlawful deductions from wages jurisdiction contained in the Employment Rights (Northern Ireland) Order 1996 (ERO). This 'series extension' provision allows claims to be submitted within three months of the last in a "series of deductions" extending further back in time, provided the last underpayment in the series was not more than three months before the claim was brought. Workers in Great Britain have a corresponding right under the Employment Rights Act 1996 (ERA). The definition of "worker" under the ERO 1996 and ERA 1996 does not include police officers being narrower than that under the WTR (NI) 1998 and WTR 1998.

The PSNI argued that the police officer claimants could not bring claims in respect of a series of deductions under the ERO 1996. Instead, they were limited to claiming under the WTR (NI) 1998 and, therefore, to sums underpaid in the last three months before the claims were brought. If back claims going back many years under the ERO 1996 were possible, the potential value of the claims dramatically increased from £300,000 to £30 million.

Judgment of the Supreme Court

Two routes but same destination: police officers can claim for a series of unlawful deductions

The Supreme Court agreed with the NICA that that police officers were not "workers" under the ERO 1996 and, as such, they could not bring claims for a series of unlawful deduction of wages. So far so good for the PSNI, but... police officers are "workers" within the meaning of European Union law. The EU principle of equivalence requires that national procedural rules applicable to EU rights must not be less favourable than those governing similar domestic actions. As the remedy under the ERO 1996 was more advantageous, the principle of equivalence was infringed by the inability of police officers under the WTR (NI) 1998 to benefit from the "series extension". Accordingly, the WTR (NI) 1998 should be construed as allowing claims for underpayments for holiday pay that were part of a series of underpayments. The Supreme Court therefore held that the following words in italics be added to regulation 30(2)(a) WTR (NI) 1998:

This means claims for back pay going back many years are possible under the WTR (NI) 1998.

Note: the principle of equivalence on which this first issue was decided will no longer be a principle of British law after 1 January 2024 as a result of the effects of the Retained EU Law (Revocation and Reform) Act 2023. It is currently unclear how the courts will address such questions from 2024.

Going on a bear hunt: series of deductions

Back in 2015 in Bear Scotland Ltd v Fulton [2015] ICR 221, the Employment Appeal Tribunal (EAT) concluded that for there to be a "series of deductions" a contiguous sequence of deductions was required. In other words, a lawful payment at any point could break a series. In addition, that a gap of three months or more between deductions (underpayments) would result in the series being broken.

At the time the Bear Scotland case was decided, the case law was fairly new that required overtime and some other payments to be included when calculating the four weeks of holiday pay derived from the WTD. Many employers faced considerable outstanding claims arising from holiday pay practices previously thought to be lawful. The rather inventive Bear Scotland judgment ensured that workers were fairly paid going forward, but limited the scope of large-scale back pay claims.

The Government too addressed fears that large-scale back claims could potentially cripple the economy. The Deduction from Wages (Limitation) Regulations 2014 were introduced, which limit all holiday pay unlawful deduction claims issued on or after 1 July 2015 to no more than two years back from the date that a claim was presented. Again, a measure to ensure fair pay going forward, but limiting the impact of potential back claims. It is important to note that this two year statutory backstop only applies in Great Britain and does not apply in Northern Ireland.

The inventive reasoning in Bear Scotland was highly criticised by the NICA in Agnew. The Court of Appeal for England and Wales in Smith v Pimlico Plumbers Ltd (No. 2) [2022] EWCA Civ 70 also provided a non-binding "strong provisional view" that the Bear Scotland judgment was wrong in this regard.

The Supreme Court has now, unsurprisingly, confirmed that the Bear Scotland "three month gap" and "contiguous sequence" rules are incorrect. A series is not ended as a matter of law by a gap of more than three months between unlawful deductions related to holiday pay. Furthermore, a series of deductions based on paying basic pay as holiday pay, without including regular overtime or allowances, is not automatically ended by a lawful payment that arises because on a later occasion there was no overtime or allowance that needed to be included.

What constitutes a series is a question of fact that must be answered in light of all relevant circumstances. While providing the usual "it depends on the facts" answer, the Supreme Court has provided some useful guidance:

1. When deciding whether or not deductions form a series, all relevant circumstances should be considered, including,
   1. their similarities and differences,
   2. their frequency,
   3. size and impact,
   4. how they came to be made and applied, and
   5. what links them together and all other relevant circumstances.
2. There is no need for the series to be contiguous (that is, next to each other in a sequence).
3. It is important to identify the underlying fault or, as the Supreme Court more dramtically put it, the "unifying vice" that links the series of deductions together. In this case, the "unifying" vice was that holiday pay was calculated by reference to basic pay rather than normal pay. It did not matter that there were some appropriate payments of pay between the holiday payments that were not subject to unlawful deductions. This did not break the series of deductions.

A composite whole: the order of leave

The Supreme Court also disagreed with the Bear Scotland approach as to when different classes of holiday leave are considered taken. It held that the four weeks of statutory holiday leave entitlement deriving from the WTD is not necessarily taken first, with additional statutory holiday (the 1.6 weeks) or enhanced contractual entitlement taken thereafter. The Court said that even though part of a worker's leave entitlement is described as "additional", there is nothing to suggest when that "additional" leave should be taken in relation to other leave. Rather, an individual's holiday entitlement must be considered a "composite whole", with each day's leave consisting of entitlement under all sources taken together.

"Normal pay" reference period

As expected, the Supreme Court confirmed that for holiday pay purposes, to calculate a daily rate for overtime that forms part of normal pay, the number of days in the four weeks' leave period should be divided by the number of working days in the reference period, rather than the number of calendar days. As for what should be the appropriate reference period, the Court simply states it will be a question of fact in each case. It observed that the NICA had encouraged the parties to agree how pay should be calculated based on a twelve-month reference period in this case, but did not make any findings on this point.

What does this mean for employers?

Series of deductions back claims

The reversal of the decision in Bear Scotland in relation to the so-called "three month gap" and "contiguous sequence" rules will have an impact, but a lesser one than would have been the case back in 2015. Since 2015, the vast majority of employers have addressed the issue of calculating holiday pay based on "normal pay" and will not have any outstanding back claims forming part of a series of deductions. For those who have not, however, it will be easier for potential claimants to establish a longer series, increasing the value of their claim.

Workers in Great Britain who are within the scope of the WTR 1998 can bring claims for underpayments of holiday pay that are part of a series, provided the last underpayment in the series was not more than three months before the claim was brought. However, such claims will also be limited to two years in light of the Deduction from Wages (Limitation) Regulations 2014. Under the principle of equivalence, you can only import the "series extension" as contained in the ERA 1996, which includes the two year backstop.

This judgment will have the largest potential impact in Northern Ireland. All workers in Northern Ireland who are within the scope of the WTR (NI) 1998 can bring claims for underpayments of holiday pay that are part of a series of underpayments going back a number of years, provided the last underpayment in the series was not more than three months before the claim was brought. They can potentially bring claims going back to the start of their employment or 1998 (if later). There is no equivalent legislative backstop restriction as applies in Great Britain for Northern Ireland.

Series of deductions – What constitutes a "series"?

The Supreme Court's guidance on the factors to be considered to determine if a series is established will undoubtedly be helpful in the context of unlawful deduction from wages claims generally and perhaps elsewhere. The legislative provisions in relation to detriment claims under the ERA 1996 refer to a 'series of similar acts or failures', so that it is not the time between the series that matters in such a claim but the factual similarity. This may open the door to more claimants relying on historic detriments and linking them to one which is in time – something that may arise in a whistleblowing claim.

Order of leave

As to the particular sequence in which annual leave entitlement is taken, the Court's composite approach is unhelpful. The Government's 2011 Modern Workplaces Consultation, which proposed revisions to the WTR 1998, included a proposal to introduce a default order in which regulation 13 leave (four weeks) and regulation 3A leave (1.6 weeks) would be deemed to be taken. As long as differing rules apply in relation to calculating holiday pay and carry over rules apply, this may be an issue for employers. Employers may wish to have a contractual clause as to the order in which the different types of statutory and contractual leave are taken. Hopefully the anticipated amendments to the WTR 1998 expected to be brought into force on 1 January 2024 will address this issue (see Employment Essentials: Autumn 2023 legislative update).

Reference period

As for appropriate reference periods, unfortunately the case-by-case basis in this approach means we still do not have any specific guidance from the courts, instead the usual "it depends on the facts". However, since 6 April 2020 the Employment Rights (Employment Particulars and Paid Annual Leave) (Amendment) Regulations 2018 introduced a reference period for calculating holiday pay of 52 weeks (or the number of complete weeks for which the worker has been employed if less than 52) in England, Wales and Scotland and may, arguably, be an appropriate reference period.

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