Supreme Court decision in Agnew

The Supreme Court recently gave its judgment in the case of Chief Constable of the Police Service of Northern Ireland and another v Agnew and others [2023] (“Agnew”) in which it held that a three month gap between underpayments of holiday pay does not automatically break a series of deductions, as had previously been held, and that Claimants may still be able to claim for pre-gap deductions if they form part of a series.

The Case

Police officers and civilian employees of the Police Service of Northern Ireland (“PSNI”) claimed that they had been underpaid in respect of their holiday pay.  They had only been paid their ‘basic pay’ when taking annual leave.  However, European case law states that employees should be paid their ‘normal pay’ when taking annual leave during the four week annual leave entitlement provided by the EU Working Time Directive.  This meant that they should have been paid for their leave at a rate that included not only basic pay but also other pay elements that were regularly received such as overtime and shift allowances.

The PSNI accepted that the Claimants had been underpaid.  The question before the Court was how far back the claims for back pay could go.  The PSNI argued that the claims would be broken if there was a gap of three months or more between deductions or from the point that a lawful payment was made.

The Decision

The Supreme Court held that a gap of three or more months between deductions was not sufficient to automatically break the chain in a series of deductions or to end the series.  It also held that where there is a series of deductions with a lawful payment made partway through it, that payment was also not sufficient to automatically break the series.  Whether the lawful payment was sufficient to break the chain would be dependent upon the circumstances of each individual case.  The court would consider the reason for the deductions and their link to any lawful payments made.

The Court concluded that it was a question of fact whether a deduction made up part of a series and that “ 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”.

In its Judgment, the Court found that the series of deductions made by the PSNI were linked, irrespective of gaps or lawful payments, by the common fault of paying holiday pay incorrectly based on normal pay.

The effect of the decision on the PSNI is costly and estimated to be in excess of £30 million, with back pay owed to over 3,700 police officers and staff.

The effect on employers

The case does not mean that all employers are liable for holiday back pay.  Many employers have been paying holiday pay correctly, i.e. paying ‘normal pay’ that includes elements of bonus, overtime, commission and allowances.  However, for employers who have not included these elements within their holiday pay entitlements, their workers can now potentially claim for any underpayment irrespective of whether the deductions occur more than three months apart or if correct payments have been made within the series.

Employers in Great Britain

Liability for back pay claims in Great Britain is however capped by a two-year limit on unlawful deductions claims by the Deduction from Wages (Limitation) Regulations 2014.  This backstop means that claims are limited to two years of unpaid holiday pay dating back from the date that the Claimant commences their claim.  Employers within Great Britain therefore have greater clarity over the extent of their potential liabilities.

Employers in Northern Ireland

The legislation that provides the two-year backstop in Great Britain was never introduced in Northern Ireland, so the decision in Agnew will have a greater effect on employers of workers in Northern Ireland.  Claims for underpayment of holiday pay could reach back to the point when the Working Time Regulations were introduced in 1998 or the start of the Claimant’s engagement, whichever is later.

Next Steps

Whilst most employers will have been correctly calculating and paying holiday pay in line with ‘normal pay’, any employers who have not been doing this should consider carrying out an audit to understand the extent of their potential liabilities.  Employers may also want to consider paying the correct amount as soon as possible since any claim must be started within three months of the date of the last deduction.  Provided that going forward holiday pay is correctly calculated and paid this can have the effect of limiting the extent of historic back pay claims.