The Supreme Court handed down its judgment which extends the right to seek compensation for underpaid holiday entitlements to police officers and employees of the Police Service of Northern Ireland ("PSNI"). This decision has raised considerable concerns about the proper calculation of holiday pay and cost the PSNI an estimated £30million. 3,380 police officers and 384 civilian employees from PSNI had long been receiving only their basic salary during annual leave, excluding overtime and specific allowances.

The Court dismantled a key defence used by employers, clarifying that a three-month interval between underpayments or a correct payment would not absolve them of their obligation to rectify historical wage deductions.

Agnew casts a spotlight on potential financial liabilities stemming from inaccurately calculated holiday pay.  Employers are reminded of the significance of aligning their practices with prior European Court of Justice judgments, which mandated the inclusion of allowances, overtime, and commission in holiday pay calculations. This especially relevant in Northern Ireland, where the safety net of a two-year claim limit does not exist.

Claims were filed under various legal provisions, Articles 45 and 55 of the Employment Rights (Northern Ireland) Order 1996. Police officers were not classified as "workers" under this legislation. Claims were also brought under Regulation 30 of the Working Time Regulations (Northern Ireland) 1998 and Regulation 43 of the Working Time Regulations (Northern Ireland) 2016. These provisions allowed workers, including police officers, to challenge underpayments but imposed a three-month deadline.

While the ruling's immediate impact is limited to Northern Ireland, it carries ramifications that reverberate across the UK, potentially heralding transformative changes in holiday pay regulations. While the unlawful deductions provisions in Northern Ireland closely mirror those in the Employment Rights Act 1996, a crucial distinction emerges in the form of the absence of a two-year limit for UK workers.

In the UK, the Deduction from Wages (Limitation) Regulations 2014 set a two-year limit for unlawful deductions claims initiated after 1st July 2015. These regulations continue to exert their influence in the UK, serving as a safeguard against substantial employer liability.

The judgment introduces the concept of a 'composite holiday', drawing attention to the fact that workers hold rights to three types of leave: four weeks governed by the Working Time Directive, 1.6 weeks of statutory leave in either Great Britain or Northern Ireland, and any additional contractual holiday provided by employers. The Supreme Court suggests that workers perceive their annual leave as a unified entity. The Working Time Directive leave mandates ‘normal remuneration’, a deviation from other types of leave. Distinctions also arise in the rescheduling rules, with Working Time Directive leave being potentially reclassified as sick leave if a worker falls ill during it, a distinction not shared by other leave types.

Employers are advised to undertake a comprehensive holiday pay audit and   ensure accurate holiday payment going forward, incorporating overtime and commission in their calculations. While the 'three-month gap' defence no longer applies, claims must still be submitted within three months of the last deduction, emphasising the distinction in this post-ruling landscape.

There seem have been an endless number of cases relating to the proper calculation of holiday pay leaving employers ever more concerned about how to the ‘get it right’.  Unfortunately, the Retained EU Law (Revocation and Reform) Act currently working its way through parliament as a Bill is going to, once passed into law, cause yet further uncertainty and will result in yet more holiday pay cases having to be decided in the years to come.     

Read the full judgment: https://www.supremecourt.uk/cases/docs/uksc-2019-0204-judgment.pdf

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