Significant development in holiday pay claims in the UK – what employers need to know

The Supreme Court has delivered a significant judgment for employers on holiday pay that may give rise to claims for backdated holiday pay by employees and workers (Chief Constable of the Police Service of Northern Ireland and another v Agnew and others). 

Holiday pay is notoriously complex and has generated a large number of important decisions from the Court of Appeal and the Supreme Court. Although individual claims are generally modest, if an employer has been using the wrong calculation for holiday pay across the whole workforce, rectifying the problem can be very expensive. 

Holiday pay claims are most often brought as claims for deductions from wages as this potentially allows employees who have been underpaid holiday pay over a period of time to claim back for a period of two years, or, if earlier, the point at which the wrong payments began. In theory, if the employee can show that the employer has made a series of deductions that are linked together in a chain, the claim can be made for the whole period, not just the most recent underpayment. 

Since 2016 and a case called Bear Scotland v Fulton, it has been accepted that in cases where there has been a chain of deductions, but there is a gap of more than three months between dates on which the wrong amounts are paid, that gap breaks the chain and prevents the employee claiming for sums that arose before the date of the 'break'. The Supreme Court in the Agnew case has now said that that is the wrong approach and tribunals should be considering a number of factors when deciding whether or not there has been a chain of underpayments - the lapse of time is only one factor. If, for example, an employer is adopting the same faulty approach to calculating pay each time it pays it, that might be enough to create a linked series of underpayments, opening the door to a larger claim. 

The statutory limit of two years on backdated claims is unaffected by the decision (although this two-year limit does not apply in Northern Ireland, where the case arose). This will mitigate, but not eliminate, the impact of the Supreme Court's ruling. For example, an employer who has made an underpayment of holiday pay in the last three months, and similar underpayments at intervals in the last two years, can no longer rely on any gaps exceeding three months to limit liability. But underpayments made more than two years ago cannot be claimed unless the employment is based in Northern Ireland, in which case the limit is six years. 

The other important ruling in the decision concerns how a day's pay should be calculated – the Supreme Court said that the calculation should be based on working days and not calendar days.

If you think you have employees who might have a claim for backdated holiday pay following this decision you should take advice about whether you have any actual exposure and if so, how best to deal with it.