The long-awaited Court of Appeal judgment has been issued in the case of Chief Constable for the Police Service of Northern Ireland and others v Alexander Agnew and others (otherwise known as the Police Holiday Pay case). The Court of Appeal found in favour of the police officers. The headline rulings are that a gap of three months or more does not automatically break the series of deductions and that the correct payment of holiday pay does not automatically break the series of deductions. It is useful to look at the decision in this case, in the context of the original Industrial Tribunal decision issued on 2 November 2018 and the position in the UK prior to that date as set out, most recently, in Bear Scotland v Fulton.

Background

The principles that came out of the Bear Scotland case, and the cases before it, were that employees have the right to be paid their normal remuneration when they’re on holiday. Normal remuneration was defined as remuneration that is intrinsically linked to the performance of the duties which the employee is contractually obliged to perform. To be treated as “normal”, the judge in Bear Scotland held that payment has to made for a sufficient period of time but did not define what this would amount to; therefore, it should be decided on a case-by-case basis. In a different case (Willetts) heard shortly after Bear Scotland, it held that pay would only be considered normal if it was paid regularly or repeatedly over a sufficient time. It too did not define what a sufficient period of time would be but agreed that, as in this case, overtime worked one in every four or five weeks was sufficiently regular to count as normal.

For employees with no settled pattern of work, many employers have used a 12-week reference period as recommended in Bear Scotland to identify what normal pay looks like.

In Bear Scotland, the court ruled that the right to receive “normal remuneration” rather than just basic salary as holiday pay is only in relation to 4 of the 5.6 weeks’ holiday that each employee in the UK is entitled to receive. The European legislation which introduced the right for employees to take holiday and to be paid for taking that holiday set the number of weeks to 4 weeks per year (or the pro-rata equivalent if part-time). The UK government, in implementing the European legislation into UK law decided to supplement the 4 weeks’ holiday with a further 1.6 weeks’ holiday (or the pro-rata equivalent).

Prior to Bear Scotland (and afterwards if employers were not paying holiday pay correctly), employees typically received their basic salary only when on holiday and did not receive any payment to reflect any bonus, commission or compulsory overtime which otherwise would have been payable as “normal remuneration”.

Holiday pay claims

Holiday pay claims are brought as an unlawful deduction from wages claim. They therefore have to be brought before the end of the period of three months, starting on the date that the holiday pay was incorrectly paid. As this is an unlawful deductions claim, the claim can be in relation to a single incorrect payment of holiday pay or a series of payments. If the claim is for a series of payments, the time limit starts counting on the last date that it was paid incorrectly. There is no legislative definition of what a series amounts to.

In Bear Scotland, the judge ruled that where there is a gap of three months or more between failing to pay the correct holiday pay on one occasion and then the next incorrect payment the series would break.

Deliberate break of the series

Bear Scotland did not explicitly deal with the scenario of whether one instance of correct payment of holiday pay could break a series of deductions. Although therefore a grey area, most employers and employment practitioners alike took the view that there was a possibility that one correct payment could break the series and, on that basis, made a correct payment and hoped that their employees would not question the (higher than usual) payment.

The effect of the breaking of the series would mean that an employee could not then bring a claim for holiday pay for the period prior to (and all the way back in time to 1998 when the Working Time Regulations were brought in unless there was another break of three months or more) the last time when it was paid incorrectly.

Backstop

Not long after the decision in Bear Scotland, the GB government introduced legislation which stipulated that even if there is a series of deductions for failure to pay the correct holiday pay, liability could not be for more than two years. However, the backstop does not apply in Northern Ireland and therefore claims may stretch back all the way to 1998.

Industrial Tribunal and Court of Appeal decisions

In the Agnew case in the industrial tribunal, the employment judge held that:

i. The ruling in Bear Scotland that a series of deductions is automatically broken by gap of three months or more was incorrect.
ii. The existence of a series of deductions is to be determined on the facts on a case-by-case basis. A series is not automatically broken by any gap, including gaps due to maternity or maternity-related illness, disability-related illness or even personal choice.
iii. A series of deductions is not automatically broken by a correct payment of holiday pay.
iv. The correct length of the reference period should be decided on a case-by-case basis. However, he remarked that 12 months rather than 12 weeks would appear to be an appropriate reference period in many cases.
v. Rather than limiting the days on which normal remuneration for holidays must be paid to four weeks of the 5.6 weeks holiday in a year, a composite amount to reflect the fraction of 4 weeks to 5.6 weeks should be paid on every day of holiday.
For example, if an employee is entitled to the minimum number of holidays per year (28 days), for each day they are on holiday they should receive 20/28 of their holiday pay entitlement. How a payroll system would calculate this is another matter entirely.
In the Court of Appeal decision last week, the judges agreed with the ruling of the lower court in relation to the four matters listed above (i-v).

So, what next?

It remains to be seen whether employees will start to pick up that they may be owed holiday pay. Until Agnew, this issue was largely not on their radars. Most alarming for many employers is that the Court of Appeal upheld the Tribunal’s view that a correct payment of holiday pay does not automatically break the series of deductions (see iii). However, both the Tribunal and the Court of Appeal were assessing this issue in the circumstance where holiday pay was inadvertently paid correctly. This could occur where an employee didn’t work any overtime or wasn’t paid a bonus during the reference period.

The Tribunal and the Court of Appeal did not address the issue where holiday pay was paid correctly by an employer on purpose and factoring any element that would constitute normal remuneration over and above basic salary. This still remains a grey area; it has not been addressed to date. It is likely that this case will be appealed to the Supreme Court. In the meantime, employers should assess their possible liability and consider the level of awareness that their employees have of their potential entitlement to back-dated holiday pay. What an employer does next should be taken on a case-by-case basis but they need to proceed with caution.

Source: Mills Selig