The Supreme Court has today (04/10/23) handed down its decision in a longstanding claim for historic holiday pay underpayments and held that the EAT’s decision in Bear Scotland was wrongly decided.
A series of unlawful deductions from wages is not broken by a gap of three months or more, provided each underpayment is factually linked to its predecessor by the same underlying cause (here the incorrect calculation of holiday pay).
Further, it cannot be assumed that the first four weeks holiday a worker takes is their entitlement under the Working Time Directive, because each day of holiday a worker takes includes, on a fractional basis, the various elements making up their total holiday entitlement (whether they be contractual or statutory).
Historical legal background: holiday underpayment claims
Strictly speaking, holiday pay is calculated in accordance with the Working Time Regulations 1998 (WTR). However, the WTR no longer reflect the current state of the law about annual leave entitlement or the calculation of holiday pay because, over the last 10 years or so, there has been a whole series of employment law decisions which have changed our understanding of the law in this area.
In practical terms, this means that many employers who followed what they thought was the law regarding annual leave at the time, have unwittingly found themselves with potential liability for historic holiday pay underpayments.
If a worker believes they have not been paid the correct amount of holiday pay, they have two main options:
- Bring a claim for the failure to pay the correct amount of holiday pay under the WTR (reg 30 WTR); or
- Bring a claim for unlawful deduction from wages in relation to the underpayment (s23 Employment Rights Act 1996).
Both claims must be brought within 3 months of the underpayment. However, in a claim for unlawful deductions, time does not begin to run until the last in a ‘series’ of deductions / underpayments.
November 2014: EAT decision in Bear Scotland
In November 2014, the EAT held that a gap of more than three months in the series of holiday underpayments will break the chain of deductions, and that the first four weeks of holiday taken by a worker should be assumed to be their entitlement under the Working Time Directive (this is known as the ‘Bear Scotland’ decision).
January 2015: Government changes unlawful deduction from wages law
Shortly afterwards, to limit the impact of historical holiday pay claims, the UK government made the following changes to the unlawful deduction from wages law for England, Wales and Scotland, but not Northern Ireland (The Deduction from Wages (Limitation) Regulations 2014 (SI 2014/3322)):
- For claims lodged after 1 July 2015, there is a 2-year limit on the value holiday backpay which can be claimed; and
- The right to paid holiday under the WTR is not incorporated as a term in employment contracts – this is designed to prevent workers getting around the 2-year limit by saying that there is a contractual right which can be enforced as a breach of contract claim.
June 2019 : Northern Ireland Court of Appeal (NICA) decision in Agnew
In June 2019, the NICA held that the EAT in Bear Scotland had been wrong when it held that:
- A three-month gap would break the chain of unlawful deductions. The NICA held that identifying a series of deductions is a question of fact in each case, but the series of deductions is not necessarily broken by a gap of three months or more. Payments made between the various holiday underpayments would not interrupt the ‘series’ of deductions, provided each holiday underpayment was factually linked to its predecessor by the same underlying cause (the incorrect calculation of holiday pay); and
- Workers automatically take the first four weeks’ of holiday provided for by the Working Time Directive (WTD) first. The NICA held that a worker’s annual leave entitlement, which can be granted from various sources (some statutory, some contractual), forms a ‘composite whole’. Each day’s holiday includes, on a fractional basis, the various elements making up that composite whole.
(Chief Constable of Northern Ireland v Agnew [2019] NICA 32; see our report here)
Although highly persuasive, the NICA’s decision was not binding on the EAT. However, it cast a shadow of doubt over the correct approach.
The NICA decision in Agnew was appealed to the Supreme Court.
February 2022: Court of Appeal makes non-binding comments in its decision in Smith
This uncertainty was amplified further by comments made by the Court of Appeal in February 2022, when it expressed its ‘strong provisional view’ that the NICA in Agnew was correct and that the EAT’s decision in Bear Scotland was wrong (Smith -v- Pimlico Plumbers Ltd [2022] EWCA Civ 70; see our full report of the decision here). However, as these comments were not binding on tribunals, lots of uncertainty remained.
October 2023 – Agnew: Supreme Court holds that EAT’s decision in Bear Scotland was wrong
The Supreme Court held that the NICA was correct, the EAT’s decision in Bear Scotland was wrongly decided and held:
- A series of unlawful deductions from wages is not necessarily broken by a gap of three months or more, provided each underpayment is factually linked to its predecessor by the same underlying cause (here the incorrect calculation of holiday pay);
- It cannot be assumed that the first four weeks holiday a worker takes is their entitlement under the Working Time Directive, because each day of holiday a worker takes includes, on a fractional basis, the various elements making up their total holiday entitlement (whether they be contractual or statutory); and
- When calculating how much additional holiday pay ought to have been paid (here because only basic pay had been paid, and no account was taken of regular overtime) the calculation must be based on the number of working days in both the reference period and the leave entitlement. The reference period is a question of fact (perhaps provided in the contract or collective agreement) with the NICA suggesting 12 months as being an appropriate reference period.
What does the Supreme Court’s decision mean in practice for employers?
Strictly speaking, the Supreme Court was considering the ‘mirror’ legislation applicable in Northern Ireland. However, it is inconceivable that employment tribunals, the EAT and the Court of Appeal will not consider themselves bound by the Supreme Court’s decision when interpreting the matching legislation applicable in England, Scotland and Wales.
In practical terms, this means that where a worker has been ‘underpaid’ holiday pay (eg because regular overtime was not taken into account), it is highly likely that a tribunal will hold each occasion when holiday pay was underpaid formed part of a ‘series’ of underpayments regardless of any gaps, unless there has been an actual break in the chain (eg when their holiday pay began to be correctly calculated). Therefore, it will probably be easier for employees to establish that they have suffered a ‘series’ of unlawful deductions due to historic underpayments of holiday pay.
However, for any claim brought after 1 July 2015 in England, Wales or Scotland, there is still a 2-year limit on the value of holiday backpay which can be claimed.
The employment tribunal service will now lift the stay from any ET claims that are currently stayed pending the Supreme Court’s decision. It is hoped the clarity the Supreme Court decision has given will aid the settlement of these longstanding claims.
Our team of specialist employment lawyers, who are experienced at handling complex claims for historic holiday pay underpayments, can provide assistance to resolve any outstanding claims you may have.
For further information, please contact:
Emma Ahmed, Hill Dickinson
emma.ahmed@hilldickinson.com
