How could the recent Supreme Court decision on holiday pay affect your business?
The law surrounding Holiday pay has been the subject of much legal debate in recent years and has caused a fair amount of friction in employment relationships too.
The recent decision of the Supreme Court in the case of The Police Service of Northern Ireland (PSNI) v Agnew will no doubt spark renewed interest in this topic for both Northern Ireland and the UK as a whole, given its far-reaching implications.
The case of Fulton v Bear Scotland in 2014 previously highlighted the topic of Holiday pay when it set out what should be included in the calculation. The case confirmed that regular overtime payments, commission and certain other payments had to be accounted for when holiday pay was calculated by employers. This decision resulted in mass claims against employers for backdated holiday pay.
The question then became “how far back can employees claim?” On 4th October 2023, the Supreme Court handed down judgment in the case of Agnew in a decision which aimed to shed light on this question. As a result, the case puts holiday pay claims back into the spotlight meaning employers should be alert as to how they deal with the calculation of holiday pay.
The Supreme Court decided that approximately 3,700 police officers and other employees of the PSNI are entitled to pursue backdated pay for incorrectly calculated annual leave payments, and that such claims can cover holiday pay that has been calculated without reference to overtime, commission and certain other payments.
The judgment has now confirmed that where there is a gap of three months between payments of incorrect holiday pay, the “chain” that would normally exist in a series of deductions is not broken and therefore claims can still be brought to cover a period that goes back more than three months.
Prior to the decision in Agnew, employees bringing claims for incorrect holiday pay would have to ensure that there was not a gap of three months or more between the date of the claim being made and any earlier deductions that the employee wanted to claim.
Alternatively, the employee could bring a new claim each time they receive holiday pay. However, that approach is not ideal and results in additional work for Tribunals and additional expense for employers when they are forced to defend multiple claims.
The mass litigation that arose from Fulton v Bear Scotland resulted in a significant liability for employers. They faced not only the cost of the backdated holiday pay shortfall, but also the weight of mounting legal fees in defending claims that lasted for a number of years.
The fact remains that any employer who does not calculate holiday pay correctly leaves themselves exposed to a very avoidable liability. Employers who have continued to pay basic pay, without making reference to overtime and commission, could be facing multiple claims.
The Supreme Court’s decision is highly likely to open the floodgates for new holiday pay claims. While the judgment will not be welcome news to employers, holidays are considered a rest break and employees should be not be deterred from taking them by fear of a financial detriment when doing so.
The difference between Great Britain and Northern Ireland
In Northern Ireland, the legislation governing holiday pay mirrors the Employment Rights Act 1996, which protects workers in Great Britain. The Supreme Court’s judgment specifically states that the decision in Agnew has repercussions for workers in Great Britain. The judgment means that employers in Great Britain will face a potential liability for up to two years’ worth of backdated holiday pay claims brought after July 2015. Whilst the two-year backdated period may seem lengthy for employers, it at least limits the exposure that employers in Great Britain face.
By contrast, in Northern Ireland, this two-year limit does not exist. This means that the potential liability for employers in Northern Ireland could be vast. Considering that the Court of Appeal in Agnew held that some holiday pay claims could go back as far as 1998, the date that the Working Time Regulations were introduced, it is not surprising to see the level of the estimated costs.
Some media outlets are reporting that the liability for PSNI could be as much as £40 million. The potential liability in other cases of this kind, even if it does not reach that level, could be enough to cripple an employer’s business.
What can employers do to minimise the risk of claims?
Employers need to take steps to ensure that the holiday pay that they pay to employees is correct and takes into account the various elements such as overtime, commission and any other payments.
In Great Britain, where the three-month time limit between deductions still applies, a correctly calculated payment made now can help prevent any link to a backdated claim.
Employers would be wise to carry out a review of holiday pay for any employees who undertake overtime or who have commission payment, or other payments which need to be included in the holiday pay calculation.
This case may present serious risks and financial implications to those businesses that may not have been calculating holiday pay correctly. We recommend carrying out a review of your current holiday pay processes and calculations and get help in developing an appropriate plan of action if any liabilities are found. Contact our team on 0800 955 6111 or email email@example.com