Landmark Supreme Court Ruling: Historic Holiday Underpayments Must Be Compensated

In last week's landmark case Chief Constable of The Police Service of Northern Ireland and another v Agnew and others, the Court delivered its verdict on the crucial issues surrounding past unlawful deductions and underpayments of holiday pay.

The Supreme Court Ruling at The Court of Appeal in Northern Ireland (NICA) confirms that Unpaid Holiday Claims in Northern Ireland may now go back up as far as an employee’s period of continuous employment, in this case dating back to 1998.

Employers operating in Northern Ireland will no longer be able to use technical arguments to limit their liability for underpaid holiday pay claims.

"Employers are now urged to meticulously review and possibly amend their holiday pay calculation methods to align with the 'normal pay' standard, which isn't confined to basic pay but also encompasses elements like overtime, commissions and allowances. This adjustment is crucial to mitigate the risk of facing claims related to unlawful deductions from wages.
Given the complex nature of this evolving area of law, it's advisable for employers to seek expert legal counsel to navigate the intricacies of the Agnew decision."

Bobby Ahmed,  Managing Director at Neathouse Partners

Northern Ireland vs the rest of the UK

Employers in Great Britain ­– that is, England, Wales and Scotland – enjoy a two-year limit on historic holiday pay claims under the Deduction from Wages (Limitation) Regulations 2014.

This two-year limit is, however, not applicable to employers in Northern Ireland. 

Impact on UK Businesses

The ruling has the potential to cost UK businesses millions of pounds in unpaid holiday pay.

"The recent Agnew decision by the Court of Appeal has significant ramifications on how UK employers should be calculating holiday pay", states Neathouse Partners Managing Director Bobby Ahmed.

Key takeaways from the decision include the clarification that a series of deductions from pay, relating to underpaid holiday pay, is a factual matter to be assessed case by case, without a three-month gap breaking the series of deductions.

Furthermore, the Court's adoption of a 'factual link' approach potentially extends the traceability of unlawful deductions to more than 2 years and indeed even longer. 

The abolishment of a three-month gap as a break in the series of deductions presents a notable departure from the previous Bear Scotland decision.

"Employers are now urged to meticulously review and possibly amend their holiday pay calculation methods to align with the 'normal pay' standard, which isn't confined to basic pay but also encompasses elements like overtime, commissions and allowances," Ahmed states, adding that "This adjustment is crucial to mitigate the risk of facing claims related to unlawful deductions from wages."

Moreover, the ambiguity surrounding the correct reference period for assessing an individual's 'normal pay' necessitates a tailored approach, possibly adopting a pragmatic rolling 12-month reference period, as suggested by the Court.

The decision also implies that the previously accepted three-month backstop for claims is no longer applicable, exposing employers to potentially extensive historical claims.

Following Brexit, the Supreme Court’s decision is final and there is no further option to appeal. However, there may be room for legislative change to undermine the impact of this judgment, dependent on political appetite.

Risk Mitigation

Seek expert legal counsel to navigate the intricacies of the Agnew decision.

This development underscores the importance of proactive compliance with the clarified standards for holiday pay calculations to avert substantial financial liabilities.

Given the complex nature of this evolving area of law, it's advisable for employers to seek expert legal counsel to navigate the intricacies of the Agnew decision and its implications on their holiday pay practices and minimise the risk of litigation.

Case Notes: Chief Constable of The Police Service of Northern Ireland and another v
Agnew and others

In 2018, an industrial tribunal determined that unlawful deductions were made from the holiday pay of nearly 3,750 Police Service of Northern Ireland (PSNI) officers and civilian staff over a period of 20 years.

This legal battle stemmed from a significant ruling (Bear Scotland v Fulton) in 2014 by the UK Employment Appeal Tribunal, which stated that employees who regularly worked overtime should receive extra holiday pay.

The 2018 PSNI tribunal ruled that holiday pay for staff was calculated based on their basic working hours, rather than considering actual hours worked, including overtime. In the same 2014 case, it was also established that workers in England, Scotland, and Wales had a limited timeframe to make a claim for underpaid holiday pay.

The Court of Appeal in Northern Ireland disagreed with these time restrictions, deeming them arbitrary and unfair.

The Court of Appeal's decision was challenged by then-Chief Constable George Hamilton and the Policing Board.

However, in 2019, the Court of Appeal upheld the tribunal's ruling, leading the PSNI to escalate the case to the Supreme Court.

Last week’s ruling mandates that the PSNI must pay approximately £40 million in holiday pay to its officers.