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Holiday Pay Entitlement – could the PSNI landmark case affect your business?

The proper payment of holiday pay had been a legal cauldron that’s been bubbling away for some time. Previously, the European Court and the Employment Appeal Tribunal (EAT) delivered decisions in 2014 in the cases of Lock v British Gas Trading Ltdand Bear Scotland Ltd v Fulton & Othersrespectively. These and other successive cases on holiday pay essentially changed the framework for paying employees during periods of annual leave. They identified ‘normal pay’ as the basis for calculating pay during periods of annual leave, writes Willis Insurance and Risk Management Employment Law Consultant Ciaran McGlone.

It is now accepted that ‘normal pay’ includes normal and regular payments above and beyond basic pay such as overtime and allowances that are paid within an appropriate reference period prior to the holiday. However, a crucial feature of the Bear Scotlanddecision was that the Court decided that any break of 3 months or more between incorrect payments would break a series of deductions and limit any backdating to that point.

In addition to the Courts position on backdating The Deduction from Wages (Limitation) Regulations 2014 came into effect in January 2015 in Great Britain limiting any backdating of holiday pay claims to 2 years.

Current Position on holiday pay

In 2018 the Industrial Tribunal in Northern Ireland found in favour of nearly 4000 police officers (PSNI) and civilian employees regarding their holiday pay claims in the case of Agnew. In summary the Tribunal found that they had only been paid their basic pay and that any claims could be backdated to 1998. In a critical and fundamental departure from the Bear Scotlanddecision the Tribunal decided that any break of 3 months would not automatically break a series of deductions.

This decision has recently been appealed in the Northern Ireland Court of Appeal. The appeal was made regarding a number of defined points.

  1. In the first instance the Court grappled with the idea of whether the Police Officer Claimants were “workers” and therefore able to present their claims under Article 45 of the Employment rights (NI) Order 1998 (ERO).

The alternative to bringing a claim under ERO was to present their claims under the Working Time Regulations (NI) 1998 & 2016 (WTR’s). The issue with only allowing the Police Officers recovery through the WTR’s as opposed to the ERO is that the WTR’s did not allow for backdating in respect of a series of deductions. While the Court found that the Police Officers were not ‘workers’, the principle of equivalence in EU law meant that words could be read into the WTR’s to allow recovery in respect of a series of deductions.

  1. In the Courts major departure from the previous case law in Great Britain, it considered what constituted a series of deductions and how such a series was broken. While the EAT in Bear Scotlandapplied the 3-month limitation concept to a series of deductions, the Court of Appeal in Agnew found that any 3 months break between incorrect payments, or indeed a correct payment, would not constitute a break in a series of underpayments. Establishing a series of deductions was a matter of finding a pattern of ‘sufficient similarity’ that would factually link each deduction.
  2. The Court of Appeal further found that there was no distinction, in terms of which order they should be applied during the holiday year, between the 4 weeks holiday provided through EU legislation and the further 1.6 weeks holiday provided for under the domestic law. The Court concluded that it was wrong to treat the EU entitlement as being front loaded into the holiday year and that there was no hierarchy of leave or support for the idea that holiday entitlement from different sources should be used up in a particular order.
  3. The Court of Appeal did however overturn the Tribunal’s decision that it was appropriate to use the total number of days in the calendar year as a divisor for working out the pay entitlement for the four-week annual leave period. The Court stated that the proper divisor was the number of working days (260) as opposed to the total days in the year (365).
  4. The Court finally considered the issue of ‘reference periods’ and the length of period that should be considered prior to the annual leave for the purpose of the employer working out ‘normal pay’. In essence, the Court stated that the reference period was fact sensitive and to be considered on a case by case basis. The Court did however repeat the Tribunals position that a 12-month reference period may provide a justified and pragmatic approach as long as it did not include periods of pay in the previous 12 months where the employee had been incorrectly paid.

While the Court of Appeal decision in Agnewhas fundamentally departed from the Great Britain case of Bear Scotlandregarding back payments for annual leave, there is nothing fundamentally new in regard to the consideration of ‘normal pay’ in a calculation of holiday pay. However subtle changes to the method of calculating holiday pay may have implications even for those employers who took heed of the impact of Bear Scotlandin 2014. While the Agnewcase has clarified some aspects of holiday pay, it has also left unresolved questions regarding the practical application of calculating holiday pay. What constitutes ‘regular pay’ and ‘reference periods’ are as undefined as ever.

Summary

All employers who have not been paying proper holiday pay would be well advised to start doing so. Failing to do so, will certainly create an ongoing financial liability that has the potential to be backdated to 1998. Those who have been including ‘normal pay’ in their calculations will need to revisit their calculations to make sure they are compliant with the Court’s decision.

However, it should be repeated that Claimants (employees) are still required to lodge any valid holiday pay claim within 3 months of the last in a series of deductions. If any underpayments are historical and are followed by a period of proper payment of more than 3 months, then those Claimants will face the normal difficulties associated with pursuing litigation outside the limitation period.

This judgement has significant repercussions for “NI Plc” and the PSNI have not yet decided on lodging a further appeal to the Supreme Court.

To find out more information on Holiday Pay Entitlements and how our Employment Law Consultant Ciaran McGlone can assist call 028 9032 9042. Visit www.willisinsurance.co.uk/news