Underpayments to holiday pay

The question of whether holiday pay is being correctly applied by employers is back in the spotlight following the Supreme Court’s long awaited decision in Chief Constable of the Police Service of Northern Ireland v Agnew. Heard in December 2022, the decision of which was handed down in October 2023, the court found in favour of the underpaid workers.

In particular, the court was considering whether gaps in underpayment will have any effect on whether back claims can be made for underpaid holiday pay as well as whether there has been discrimination against the respondents under the European Convention on Human Rights.

The ruling means that the police officers and other employees of the Police Service of Northern Ireland are entitled to bring a claim for a series of underpaid holiday entitlement, and that a gap of three months, or a correct payment does not break the chain of a series of deductions. It is thought that these claims may cost up to £40 million in underpaid back claims.

This ruling is likely to have wide-reaching financial implications to employers, even where claims for holiday pay, bonuses and commission can only reach back two years. This was imposed by the Deduction from Wages (Limitation) Regulations 2014 (2014 Regulations) where a claim has been brought after 1 July 2015, but that does not apply in Northern Ireland, and nor does it apply to other payments that include statutory sick pay, statutory maternity/paternity/adoption pay and time off for union duties, where the claim can go back to when the underpayment first began. 

Specifically for holiday pay, and particularly in NI, but across the UK generally, any employer who did not re-evaluate holiday pay in light of various European Court of Justice decisions and is only making payments based on base pay and not including regular allowances, overtime and commission may now find themselves in a position where there is a claim.

Also of wide-reaching implication is the case’s wider application. The so-called ‘three month gap’ now can’t be used by employers in claims about any kind of underpayment so as long as there is a common fault, so a worker can make claims for historic deductions. The decision also considers how to calculate a day’s leave - concluding that it is a composite rather than straight aggregate of Working Time Directive leave, UK statutory leave and contractual leave - with different rules applying to each, meaning the standard calculation of holiday pay is not straightforward. The worker is entitled to four weeks’ leave from the Working Time Directive (EU leave), 1.6 weeks’ statutory leave (UK leave) plus of course any additional contractual holiday entitlement (if any) the employer provides on top. 

Clarity and reform by the government is now urgently needed. It did undertake a consultation on reforms to the Working Time Regulations, Holiday Pay, and the Transfer of Undertakings (Protection of Employment) Regulations in May 2023, the as yet unpublished outcome of which might give further guidance on how to calculate holiday pay. The reform plans were that the leave entitlements would become one entitlement of 5.6 weeks’ leave, but still leaves a knock-on effect for various other holiday issues, as different rules have applied to both. In the meantime, employers should at the very least ensure that holiday pay is being paid correctly going forward.

Posted on 11/08/2023 by Ortolan

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