Last reviewed 3 July 2019

There has been a host of case law on the calculation of holiday pay in recent years, which has meant that payments for overtime and commission are now to be included in calculations. Stuart Chamberlain, Croner-i author and senior employment consultant examines the recent NICA judgment in Chief Constable of Northern Ireland Police v Agnew and assesses its impact on employers, not only in the Northern Ireland but also the remainder of the UK.

With employers facing significant claims for underpayment of holiday pay, in 2014, case law and legislation came to employers’ rescue, limiting the time that underpayments can apply. The Northern Ireland Court of Appeal (NICA) has now cast considerable doubts on these limits.

The present position in Great Britain

In late 2014, the EAT concluded in Bear Scotland v Fulton that, where there is a gap of three months or more between deductions in holiday pay, this will break the series of deductions. This appeared to significantly limit attempts by workers to claim large back payments for unlawful deduction of wages in respect of holiday pay.

The same year, in response to the EAT’s judgment, the Government introduced new legislation. The Deduction from Wages (Limitation) Regulations 2014, which amended the Employment Rights Act (ERA) 1996, limit claims to two years, ending with the date that the claim is presented.

The Northern Ireland Court of Appeal

The case before the Northern Ireland Court of Appeal (NICA) involved claims from over 3380 police officers and 264 civilian employees who had only received basic pay during their holidays. The Northern Ireland police concede that overtime should have been included in the calculation, but argued that they could rely on Bear Scotland to limit the extent of the deductions.

However, in June 2019 in Chief Constable of the Police Service of Northern Ireland v Agnew the NICA ruled that:

  • The EAT’s analysis in Bear Scotland that a gap of three months or more between deductions broke a “series” was incorrect and had resulted in “arbitrary and unfair” results.

  • The NICA’s judgment stressed that a series is not broken by lawful payments or by a gap in payments of three months or more. There is nothing in the legislation (the Employment Rights (Northern Ireland) Order 1996) that expressly or impliedly imposes a limit on the gaps between deductions making up a series. Indeed, this would lead to arbitrary and unfair results.

  • What constitutes a series of deductions must be considered in the circumstances of each case.

  • Further, annual leave is not taken in a particular sequence — the different types of leave (the four weeks’/20 days’ EU leave, the Working Time Regulations’ (WTR) eight days and any additional contractual leave) were indistinguishable.

Impact on employers

This decision is extremely bad news for employers in Northern Ireland. Workers there will be able to recover underpayments going back to the start of their employment (or back to 1998 — when the WTR came into force — if earlier). It is now estimated that the claims are valued at £40 million.

What about the remainder of the UK? The case was decided under Northern Ireland law so surely the NICA’s decision is not binding on England, Wales and Scotland? This is correct only up to a certain point:

  • The judgment is persuasive rather than binding, but it does represent a serious undermining of the legal principles put forward by the EAT in Bear Scotland.

  • The NICA’s judgment so effectively demolishes the arguments for limiting back payments of holiday pay, that it could be used in support of claims in the rest of the UK.

  • The wording of the Northern Ireland Order 1996 is identical to that in the Employment Rights Act 1996. The issues are, therefore, the same.

  • It has often been argued that the Deduction from Wages (Limitation) Regulations 2014, which limit the back payment of unlawful deduction of wages to two years, contravene EU law. The NICA’s judgment offers the opportunity to challenge this legislation.

  • The NICA stated that employers cannot hide behind lack of knowledge on this issue.

What should employers do now?

Employers should check that staff receive “normal pay” while on holiday. The NICA did state that each day of pay should be made up of a proportion of directive leave (the original 20 days), WTR leave (the additional eight days in the UK) and any further contractual entitlement. This is too administratively complex to introduce for most organisations. Therefore, unless they are willing to change staff terms and conditions to differentiate between different types of leave and state in which order they may be taken, UK employers may prefer to stick to what they normally pay.

In view of the NICA’s challenge to (and demolition of) the EAT’s judgment in Bear Scotland, the Supreme Court now needs to examine the issue to remove further uncertainty.

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