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Holiday Pay – the latest development

Written by Brabners LLP


On Wednesday 4 October 2023, the Supreme Court handed down its unanimous judgment in the case of Police Service of Northern Ireland v Agnew and Others (“Agnew”). The judgment could potentially increase the liability of businesses for historic underpayments of holiday pay, although in many cases this judgment will not have any effect on an umbrella employer’s existing exposure.

The Agnew case concerned whether claims for unlawful deductions from wages can be brought against an employer where there are gaps of three months or more between a series of underpayments. As expected, the Supreme Court disagreed with the approach previously taken by the Employment Appeal Tribunal Scotland in the leading case of Bear Scotland Ltd v Fulton and another (“Bear Scotland”).

The Supreme Court’s decision in Agnew means that employers can no longer limit their liability for historic underpayments of holiday pay by arguing that the ‘series of deductions’ is broken where there is a gap of more than three months between underpayments. The Supreme Court has ruled that a ‘series of deductions’ can still exist (and employers can be held liable for all deductions or underpayments in the series) even where more than three months have passed between incorrect payments of holiday pay.

How will the Agnew decision impact employers?

The effects of this case are likely to be felt most by the recruitment sector and other sectors where part-year workers are regularly employed, such as education, care and hospitality. Organisations that already have a potential holiday pay liability as a result of last year’s Supreme Court ruling in Harpur Trust v Brazel (“Harpur Trust”) may be particularly affected by this decision.

Employers in England and Wales will, however, be comforted by the fact that there remains a two-year backstop on unlawful deduction from wages claims — meaning that Tribunals can only consider underpayments of holiday pay going back two years from the date of the worker’s claim (provided that the claim simply relates to a miscalculation of holiday pay, rather than a failure to allow the worker to take holiday altogether).

Employers in Northern Ireland — where there is no two-year backstop — face the greatest uncertainty. This judgment risks opening the floodgates to such claims in Northern Ireland, potentially allowing claims to date back to 1998.

A spotlight on the Agnew case

The Agnew case related to an ongoing miscalculation of holiday pay by the Police Service. The Police Service had, for years, been calculating holiday pay using basic salary only rather than ‘normal’ pay which included overtime and other allowances (such as shift allowances).

As per section 13 of the Employment Rights Act 1996, the definition of an unlawful deduction from wages is where the total wages paid to the employee is less than the total amount of wages properly payable to the employee. This can therefore include underpayments of holiday pay.

Unlawful deduction claims can be brought by workers in respect of unpaid or underpaid wages or holiday pay in the employment tribunal, subject to the two-year backstop (in England and Wales). This prevents deductions from going back more than two years before the date of the claim.

As is the norm with tribunal proceedings, the claim must be brought within three months from the date of payment of the wages from which the deduction was made, or the last payment in the series if there has been a consistent series of deductions/underpayments.

Until now, Bear Scotland was the leading case on this point and considered what is meant by ‘a series of deductions’. It concluded that a gap of more than three months between two under-payments would break the series. This is the case that the Police Service in the Agnew case sought to rely on to limit their liability for incorrectly calculating their employees’ holiday pay.

However, the Supreme Court in Agnew has departed from this decision and ruled that a ‘series of deductions’ can exist even where more than three months have passed between incorrect payments of holiday pay.

How will this affect umbrella companies?

The reality is that this decision may have a limited effect on umbrella companies, particularly those that offer advanced holiday pay, because it is unlikely that there would have been a 3-month gap between payments of holiday pay to employees, meaning that such employers would probably not have been able to rely on the “old” Bear Scotland decision anyway.

Holiday pay remains a hot and concerning topic within the recruitment sector, and with the outcome of the Government’s consultation on holiday pay yet to be published and a looming general election, the position is likely to evolve further.

As such, umbrella companies should review their potential exposure in light of this decision and be alert to the changing holiday pay landscape.

This bulletin is for general guidance only and should not be used for any other purpose.

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