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New UK Supreme Court decision on holiday pay

Miniature woman on calendar holiday pay

The Supreme Court has issued a judgment this week in the case of Chief Constable of the Police Service of Northern Ireland v Agnew, a case brought by police officers and civilian staff. The decision will have some impact on employers throughout the UK and we look at the main points below.

Series of deductions

Perhaps the most important aspect of the Court’s decision is to overturn the previous case law on what amounts to a “series of deductions”. Holiday pay claims are often brought as claims for deductions from wages. The previous case law (the well-known Bear Scotland case in the EAT) had held that a series of deductions could be broken by:

  • a gap of three months between deductions; or
  • the employer making a correct payment.

This Supreme Court has now confirmed that this is wrong in most cases. In Northern Ireland the financial impact of this will be significant (an estimated £30 million for the PSNI in this case) as there is no limit on the period for which claims for unlawful deduction can be made. However, in the rest of the United Kingdom, legislation was introduced in 2015 which limits the “look-back” period to two years. So, in England, Wales and Scotland, the position now is that a series of up to two years’ worth of deductions can be claimed and the series will not normally be broken by an interval of more than three months between deductions or by a correct payment being made during the period.

Holiday pay must be based on “normal” pay

In this case, the police officers and civilian employees received their basic salary, exclusive of overtime or other allowances, when on annual leave. The Court confirmed that this is contrary to European Court of Justice decisions which have established that holiday pay should be calculated by reference to a worker’s “normal pay”, and this must also reflect the overtime that the worker usually works, as well as other regular allowances or commission.

However, the Court stopped short of giving a comprehensive direction on what constitutes “normal” pay, acknowledging that it will be a fact-sensitive issue in most cases.

Reference period for calculation of holiday pay

The Court considered the question of what reference period should be used to calculate the daily rate for normal holiday pay. It held that the common practice of basing holiday pay on the pay received during a fixed reference period (usually the 365-day period prior to the holiday) is not necessarily correct. Instead, it held that what constitutes normal pay is a question of fact, just as the reference period is a question of fact, and both should be taken into consideration when working out the normal pay amount.

For employers this is a difficult element of the decision as it renders the calculation of holiday pay potentially different for each single employee if it is to accurately reflect the “normal” pay they could have expected to receive during their holiday.

Order of annual leave

The Court also overturned the decision in Bear Scotland on the question of the order in which annual leave is deemed to be taken. In the Bear Scotland case, the EAT held that employees should be deemed to take their basic four weeks of statutory leave first, then the additional 1.6 weeks’ statutory leave, and then any additional leave (e.g. contractual annual leave). However, the Supreme Court has held that this is incorrect and that statutory leave derived from all sources should be viewed as forming part of a single, composite pot of annual leave days. This element of the decision will have limited impact in Great Britain, although is likely to mean that terms in employment contracts that provide for statutory leave to be taken first no longer have effect.

Action points for employers in Great Britain

  • Check your approach to holiday pay: what elements of pay are taken into account? Are you using a standard, fixed reference period?
  • Check what your published policies say about holiday pay.
  • Consider your exposure to unlawful deductions claims – even claims going back two years could be financially significant.

For further information contact Blair Adams or anyone in our Employment Team.

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