Supreme Court judgment exposes employers to claims for historic holiday pay underpayments

A recent judgment could expose employers to increased claims for historic holiday pay underpayments.

Here, recruitment and workforce solutions specialists Grace Pennington and Simon Whitehead explore how employers could be affected.

End to limited liability for historic underpayments

On Wednesday 4 October 2023, the Supreme Court handed down its unanimous judgment (the judgment) in the case of Police Service of Northern Ireland v Agnew and Others (Agnew). The judgment could increase the liability of businesses — particularly those across the recruitment sector — for historic underpayments to holiday pay due to the increased exposure to underpayments caused by last year’s Supreme Court decision in Harpur Trust v Brazel (Harpur Trust).

The Agnew case concerns whether claims of unlawful deductions from wages can be brought against an employer where there are gaps of three months or more between a series of underpayments. As expected, the Supreme Court disagreed with the approach taken by the Employment Appeal Tribunal Scotland in the leading case of Bear Scotland Ltd v Fulton and another UKEATS/0047/13 (Bear Scotland).

The Supreme Court’s decision in Agnew means that employers can no longer limit their liability for historic underpayments of holiday pay by arguing that the ‘series of deductions’ is broken where there is a gap of more than three months between underpayments. The Supreme Court has ruled that a ‘series of deductions’ can still exist (and employers can be held liable for all deductions or underpayments in the series) even where more than three months have passed between incorrect payments of holiday pay.

How will the Agnew decision impact employers?

The effects of this case are likely to be felt most by the recruitment sector and those sectors where part-year workers are regularly engaged such as education, care and hospitality. Organisations that already have a potential holiday pay liability as a result of last year’s Supreme Court ruling in Harpur Trust will be particularly affected by this decision.

Employers in England and Wales will, however, be comforted by the fact that there remains a two-year backstop on unlawful deductions from wage claims — meaning that Tribunals can only consider underpayments of holiday pay going back two years from the date of the worker’s claim (provided that the claim simply relates to a miscalculation of holiday pay, rather than a failure to allow the worker to take holiday altogether).

Employers in Northern Ireland — where there is no two-year backstop — face the greatest uncertainty. This judgment risks opening the floodgates to such claims in Northern Ireland, potentially allowing claims to date back tens of years.

Holiday pay is a hot topic within the recruitment and workforce solutions sector at the moment and with the outcome of the ‘Calculating holiday entitlement for part year and irregular hours workers’ consultation yet to be published and a looming general election, the position is likely to evolve further.

As such, businesses where contingent or flexible labour are engaged — or where they exist within the supply chain (and where the risk of having miscalculated holiday pay is generally higher) — should review their potential exposure in light of this decision and be alert to the changing holiday pay landscape.

A spotlight on the Agnew case

The claim within Agnew surrounded the loss of earnings when holiday pay is calculated using basic salary rather than normal pay, which includes overtime and other allowances (such as shift allowance). As per section 13 of the Employment Rights Act 1996 (ERA 1996), the definition of a deduction is where the total wages paid to the employee is less than the total amount of wages properly payable to the employee. 

Unlawful deduction claims can be brought by workers, allowing them to claim for unpaid or underpaid wages in the employment tribunal subject to the two-year backstop. This prevents deductions from going back more than two years before the date of the claim. 

As is the norm with tribunal proceedings, the claim must be brought within three months from the date of payment of the wages from which the deduction was made. 

The current statutory position (as per section 23 of the ERA 1996) states that, where a complaint is brought in respect of a series of deductions or payments, the time limits begin to run with the last deduction of payment in the series. Bear Scotland was the leading case on this point and considered what is meant by ‘a series of deductions’. It concluded that a gap of more than three months between two deductions of non-payments would break the series. 

The Supreme Court in Agnew has departed from this decision and ruled that a ‘series of deductions’ can exist where more than three months have passed between incorrect payments of holiday pay.

Talk to us

If your organisation is likely to be affected by this judgment or you would like to review your current policies and procedures, talk to us.