Yesterday, 4 October 2023, the UK Supreme Court gave their much-anticipated judgment in the case of Chief Constable of the Police Service of Northern Ireland and another v Agnew and others.

It unanimously ruled that, contrary to Bear Scotland, employees can claim for a series of underpayments of holiday pay even if those underpayments are separated by a gap of greater than three months. While employers will be concerned that Agnew removes a valuable limit on their liability for historic holiday pay claims, the impact of this judgment remains mitigated by the statutory two-year backstop on claims in Great Britain (at least for now).

The case concerned police officers and civilian staff of the Police Service of Northern Ireland who received basic pay during periods of annual leave. Following a long line of authorities dealing with the calculation of holiday pay, police officers and civilian staff brought claims for underpayment of holiday pay. They argued that the calculation of holiday pay should have included an element for overtime, because many of the police officers and civilian staff regularly supplemented their pay by working compulsory overtime. The Police Service of Northern Ireland agreed that there had been an underpayment on that basis but sought to limit the period for which the police officers and civilian staff were entitled to claim for back pay.

Employment legislation (the Employment Rights (Northern Ireland) Order 1996 in Northern Ireland and the Employment Rights Act 1996 in Great Britain), permits deduction from wages claims (including claims for underpaid holiday) to be brought within three months of the last in a ‘series of deductions’. The potential liability for underpaid holiday was limited by the Employment Appeal Tribunal’s judgment in Bear Scotland Ltd and others v Fulton and others UKEAT/0047/13. In that case, the EAT held that a gap of more than three months between underpayments would ‘break’ the series of deductions and serve to defeat claims in respect of underpayments before that gap. This ruling often assisted employers to defend underpayment of holiday pay claims by breaking the ‘series of deductions’ where there had been a period of more than three months during which no annual leave had been taken.

The Supreme Court’s judgment in Agnew effectively reverses that decision, making clear that a “series” of deductions is not necessarily broken if more than three months elapses between underpayments. In doing so, the Supreme Court noted that the general purpose of the relevant legislation in Northern Ireland, and indeed in Great Britain, is to “protect workers, some of whom may be vulnerable, from being paid too little for the work that they do”. It reasoned that, if an employer’s failure to properly pay an employee would otherwise constitute a series of deductions, they should be able to link underpayments without them necessarily being within three months of each other as “the imposition of a mandatory cut off after an interval of three months might indeed produce unfair consequences”. Instead, the Supreme Court ruled that whether a claim in respect of two or more deductions constitutes a claim as regards a series of deductions is ‘essentially a question of fact, and in answering that question all relevant circumstances must be taken into account, including, in relation to the deductions in issue: their similarities and differences; their frequency, size and impact; how they came to be made and applied; what links them together, and all other relevant circumstances’.

Importantly, the Supreme Court also held that a lawful payment will not necessarily operate to break a series of deductions. It noted that it will depend on the nature and reason for the deductions of which complaint is made, and whether and, if so, how any lawful payment is related to the deductions. In Agnew, calculation of holiday pay by reference to basic pay did on occasion result in the correct holiday pay being made where no overtime had been worked in the reference period for calculating holiday pay. In the circumstances, the Court held that the lawful payment of holiday pay did not break the series of deductions because each payment (both correct and incorrect) was still linked to its predecessor by the common fault or vice that holiday pay was calculated by reference to basic pay rather than normal pay.

Whilst the Supreme Court’s ruling will cause alarm for employers throughout the UK, its effects will be less acutely felt in Great Britain where, unlike in Northern Ireland, the Deduction from Wages (Limitation) Regulations 2014 introduced a two-year ‘back stop’ on claims for holiday pay – meaning that employment tribunals can look back no further than two years from the date of the complaint. However, we anticipate that the legality of the 2014 Regulations may well be challenged in the future.

The Supreme Court has changed the landscape for UK employers who can now face lengthier, and inevitably more expensive, claims for historic underpayment of holiday pay. Our team has extensive experience of advising on holiday pay compliance and regularly represent employers in tribunals throughout the UK where challenges are raised by workers in respect of holiday pay. Please get in touch with a member of the team if you would like assistance with your organisation's current holiday pay arrangements.

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