This morning, the UK Supreme Court handed down its long awaited decision in Chief Constable of the Police Service of Northern Ireland and another v Agnew and others, dismissing each ground of appeal.

This case concerned police officers and civilian staff who brought claims for underpayment of holiday pay, having historically received only basic pay during annual leave. The Respondents alleged that their holiday pay should have reflected their normal pay, including overtime, and that they could establish a “series” of deductions from their wages which had occurred over the course of their employment.

Most importantly, the Supreme Court found that a “series” of unlawful deductions from wages is not broken by a gap of more than three months, or by an inadvertent correct payment. This means that, in Northern Ireland at least, the “series” of deductions can potentially stretch back to the beginning of employment, or the implementation of the Working Time Regulations in November 1998.

While an individual deduction from pay may be relatively small, the ability to establish a “series” of deductions over this time period will have substantial cost implications for the PSNI, and potentially for other employers facing similar claims in Northern Ireland. The implications are less alarming for employers in Great Britain, who can rely on the two-year backstop for these claims.  

Background

This case involves claims from over 3,000 police officers and civilian staff (Respondents) against the PSNI (Appellants) for failure to calculate their holiday pay correctly, in accordance with the Working Time Regulations (NI) 1998 / 2016 (WTRs), which implemented the EU Working Time Directive (WTD). They are based on case-law developed by the European Court of Justice (ECJ) over the last decade which has fundamentally changed how holiday pay is calculated.

The WTRs simply state that a worker is entitled to be paid at the rate of a “week’s pay in respect of each week of leave”, in accordance with the normal rules on calculating a week’s pay for workers contained in the Employment Rights (NI) Order 1996. These differentiate between workers with regular hours, and those without regular hours, who should receive an average of their actual remuneration over a specified reference period.

Whether a “week’s pay” during annual leave should include other regular pay elements, such as overtime and commission payments, have been subject to a series of high-profile decisions.

In 2004, the English Court of Appeal decision in Bamsey v Albon Engineering and Manufacturing plc established that overtime was not part of a worker’s “normal working hours” for the purpose of calculating a “week’s pay” unless the employment contract required overtime to be provided and worked. The Court of Appeal decided that the WTD did not entitle employees to receive more pay during annual leave than they were contractually entitled to earn while working.

This decision was effectively overturned by the ECJ in Williams v British Airways plc in 2012. Here, the ECJ decided that a worker’s pay during annual leave must be “comparable” to their pay while working, and therefore should include any payments that are “intrinsically linked” to their performance of their employment contract.

This approach was reaffirmed by the ECJ in Lock v British Gas Trading Ltd in 2014. This case concerned a worker who earned a basic salary plus regular commission payments. The worker received basic pay during their paid leave, along with commission payments they had already earned. This meant that their overall pay decreased when they took annual leave, because they were not earning commission. The ECJ decided that this was contrary to the WTD, as it could discourage workers from availing of their entitlement to paid leave.

The impact of these decisions was considered by the Employment Appeals Tribunal in its seminal decision in Bear Scotland. This EAT essentially confirmed that the ECJ’s decisions in Williams and Lock should be followed for the 4 weeks of leave which are derived from the WTD, meaning that holiday pay should include other payments such as regular overtime or commission. The EAT clarified that the additional 1.6 week’s leave derived from domestic UK law could still be calculated following Bamsey.

The effect of this is that workers are now entitled to “normal pay” for four weeks’ WTD leave, but not during the additional 1.6 weeks’ leave or any further leave granted by the employment contract, during which they may receive basic pay only.

In Agnew, the Appellants acknowledged that they had incorrectly calculated holiday pay by reference to basic salary only from the commencement of the Working Time Regulations in November 1998, when it should have included other elements such as overtime and allowances over a reference period. However, the parties disagreed on how workers’ individual holiday pay entitlements should be calculated, and therefore the extent of the remedy available.

In bringing their claims, the Respondents relied on their statutory right not to suffer unauthorized deductions from wages under the Employment Rights (NI) Order (ERO). These claims must be brought within three months of the deduction, or the last in a “series” of deductions. The House of Lords (as it then was) had previously established in Stringer that failure to provide paid leave in accordance with the WTRs would constitute an unauthorized deduction from wages.

The effect of Stringer was that claimants could potentially establish a series of deductions reaching back to the introduction of the WTRs in November 1998. This lead to legislation to create a “two year backstop” for unlawful deductions claims in Great Britain. However, this was never introduced in Northern Ireland, with potentially significant cost implications for the Appellants in Agnew and other employers.

In Bear Scotland, the EAT decided that a “series” of deductions is broken by a gap of more than three months between the relevant deductions. This was rejected by the first instance Tribunal in Agnew, which also decided that occasional correct payments would not break the series of deductions, if they otherwise remain factually linked.

 

Court of Appeal decision

The Tribunal’s first instance decision in 2018 made a number of key findings, which were largely upheld by the Northern Irish Court of Appeal (NICA) in 2019. In short, the NICA held that:

• Whether there is a “series” of deductions must be decided on a case by case basis and will depend on the facts. The deductions must be sufficiently similar and factually linked together in the series of deductions.

 

• Occasional lawful payments for a particular reference period will not break the “series”.

 

• The decision in Bear Scotland was incorrect in that a gap of more than three months between unlawful deductions will not break the “series”.

 

• The appropriate reference period will be fact sensitive and the parties should adopt a pragmatic, administration-friendly method for calculating and paying “normal pay” based on averages taken over a rolling 12 month period immediately preceding the period of leave.

 

• Annual leave drawn from each source – UK law, European law and the employment contract – is indistinguishable, meaning it must be taken proportionately rather than in a particular order.

Our article following the NICA’s decision is here and the full judgment is here.

 

Issues for the Supreme Court

The Supreme Court was asked to hear four grounds of appeal.

• Whether the Respondents in bringing their complaints as to a series of unlawful deductions and underpayments of holiday pay are restricted to a period ending no later than three months prior to the presentation of the complaints to the Tribunal.

 

• What is meant by a series of unlawful deductions to pay and when such a series ends.

 

• What is the correct approach to calculating unlawful deductions and underpayments of holiday pay, including the approach to annual leave entitlement, overtime and the reference period for calculating normal pay.

 

• Whether the Respondents have been discriminated against contrary to Article 14 of the European Convention on Human Rights read in conjunction with Article 1 of Protocol 1. This ground relates to the principle of equivalence for police officers, which we haven’t dealt with below.

 

Supreme Court’s decision

This morning, the Supreme Court dismissed each ground of appeal. It decided that:

• Imposing a strict three-month time limit for bringing a claim in respect of each alleged deduction would represent a “wholly unreasonable burden” on workers if the acts form part of a “series”.

 

• The EAT’s decision in Bear Scotland that a “series” would be broken by a gap of more than three months was erroneous. The Court considered that this could lead to arbitrary and unfair consequences for employees in terms of when they take their leave, and that it could allow employers to “game the system” by staging payments to avoid a “series” arising at all.

 

• Whether or not deductions constitute a “series” is a question of fact, based on the relevant circumstances, which might include their frequency, size and other factors linking them together. However, the Supreme Court did note that it is important to demonstrate the underlying, “unifying vice” which links the series of deductions to each other.

 

• The “series” is not broken or ended by a correct or lawful payment, in so far as that payment applies the same common fault which had led to the incorrect, unlawful payments.

 

• In this case, there was a “series” of deductions which were factually linked by the common fault of calculating holiday pay by reference to basic pay rather than normal pay, and the series could be traced back to November 1998.

 

• The NICA was correct in deciding that annual leave is not required to be taken in a particular order, and that the “ultimate source” of leave has “no bearing on the importance of that leave to workers”, who will likely regard their leave entitlement as a “composite whole.”

 

• This means that, “if and in so far as it is not practicable” to distinguish between different sources of annual leave, then a worker’s entire annual leave should be regarded as a “single, composite whole.”

 

• When calculating a worker’s normal pay for holiday pay purposes, the lawful approach is to adopt a divisor based on the working days in the reference period, and not the number of calendar days.

 

• The appropriate reference period will be a question of fact. The Supreme Court noted, without formally endorsing, the NICA’s pragmatic suggestion that the parties adopt a 12 month reference period.

 

The Supreme Court’s full decision is here.

 

Implications for employers

While this decision originates from the Northern Irish courts, the Supreme Court decisions are binding across the UK. While employment law is devolved in Northern Ireland and increasingly differs from Great Britain, the legislative requirements around paid annual leave are essentially identical, and the decisions reached by the first instance Tribunal and NICA were based on cases decided in Great Britain. This means that this judgment impacts employers across the UK and not just in Northern Ireland.

However, the practical effect of this judgment will be much greater in Northern Ireland, given that there is no local equivalent to the two-year backstop on claims which was introduced in Great Britain. This will allow some claimants to establish a “series” of deductions stretching back to 23 November 1998, with potentially onerous cost implications. Indeed, the Supreme Court recognize that the cost to these Appellants will be circa £30m.

It is no surprise that the Supreme Court has decided that a gap of three months or more will not break the “series” of deductions; this element of the judgment has always been regarded as vulnerable to appeal. Nevertheless, it removes the potential for employers to artificially break the series by staging payments.

Employers must also keep in mind that they cannot rely on the “series” being broken by correct payments which share the common fault with the incorrect payments. This essentially means that an inadvertently correct payment does not matter, if the same calculation has been applied.

For example, if an employee who works regular overtime has incorrectly received basic pay only during paid leave, the “series” of deductions will not be broken by a correct payment for a period during which there was no overtime worked.

The Supreme Court’s agreement with the NICA that the ultimate source of leave (i.e. the WTD, WTRs or the employment contract) has no bearing on how a worker regards their leave entitlement may disappoint employers who currently distinguish the order in which leave is deemed to be taken.

However, the Supreme Court does indicate that leave must be regarded as part of a single, composite whole only “in so far as it is not practicable” to distinguish between the different sources of leave. This leaves open the possibility that an employer who is prepared to implement a sophisticated system to track and distinguish between leave types could continue to separate WTD leave (which is subject to the normal pay rule) from non-WTD leave (which is not) and pay accordingly. The cost and administrative implications of this are likely to be counter-productive, with many employers preferring to apply the same approach across all 5.6 weeks’ annual leave.

Finally, while not actually endorsed by the Supreme Court, it does appear that a 12 month reference period will be acceptable as a pragmatic approach when assessing holiday pay entitlements for workers with seasonal fluctuations in their working hours.

While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.