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The correct calculation of holiday pay has been a headache for employers for some time, following various European cases as to what additional payments should be encapsulated within the calculation of “normal” pay.

The Supreme Court’s decision in the case Chief Constable of Police Service of Northern Ireland v Agnew has made it easier for employees to link underpayments of holiday pay together. Essentially the case removed the three month gap principle that previously made it difficult for employees to link holiday underpayments together if there was a three month gap between underpayments.
This is an important case for employers to be aware of as it significantly increases the risk of claims for underpayments of holiday pay.

What was the three month gap principle?

Complex rules apply to how far back employees can bring claims. Legislation limits holiday pay claims bought as unlawful deduction of wages claims to 2 years’ back pay.

It has also always been the case under the Employment Rights Act 1996 that any claims for underpayments of holiday pay must be brought within 3 months of the relevant payment, otherwise a claim cannot be brought as it is out of time.

However, there is an exception if there are two or more underpayments of holiday pay that form part of a series of underpayments within the two year period. In this case, the underpayments can be linked and claimed for together.

It had previously been the case following Bear Scotland v Fulton that, where there was a series of underpayments, each underpayment had to be within 3 months of the previous underpayment to be claimed together. For example, under this principle if there was an underpayment of holiday on 12 October 2023, 12 August 2023, 12 July 2023, and 12 March 2023, it may be possible to bring a claim for 12 October 2023, 12 August 2023, and 12 July 2023 as each one is within 3 months of the other, but not for 12 March 2023 as this is more than 3 months prior to 12 July 2023.

The Bear Scotland v Fulton case was helpful for employers as it effectively limited the extent many employees could claim holiday pay to less than 2 years where they had taken holiday less regularly, or due to their working pattern, had received the correct holiday pay intermittently. Whenever there was a three month gap in the employee taking or being incorrectly paid their holiday, this would break the chain and limit the amount they could claim.

What was the decision in Chief Constable of Police Service of Northern Ireland v Agnew?

This position has recently changed following the case of Chief Constable of Police Service of Northern Ireland v Agnew.

Essentially the Supreme Court re-looked at the three month gap principle and decided that whilst it is still the case that the claim must be brought within 3 months of the date the last underpayment, the 3 month limit does not apply to other payments that form a series of deductions. A three month gap therefore no longer automatically breaks the chain.

Using the example above, following this decision it may be possible to bring a claim for all of these underpayments of holiday pay, including 12 March 2023, provided that the claim is brought on or before 11 January 2024 (being the 3 months from the last underpayment (12 October 2023) in that series of deductions).

What is a “Series” of deductions?

An important question in all of this is whether it can be properly held that there has been a “series” of deductions. Even following this case, the fact that multiple deductions have been made will not necessarily mean that there has been a “series” of deductions.

Instead, the tribunal made it clear that it will be a question of fact and all the relevant circumstances must be taken into account. Matters that the tribunal will consider include (but are not limited to):

So for example, in a situation where the employer made underpayments of £300 in January 2022 and £150 in May 2022 due to failing to take a contractual clause into account, and then for £5 in October 2023 due to a typing error when putting in the figures for payroll, the January 2022 and May 2022 payments are less likely to be counted as being in the same “series” of deductions as the October 2023 deduction. A long time has passed between the May 2022 and the October 2023 payments, they do not appear to be regular enough to form a series, they arose by different means and, ultimately, they are largely distinct and separate from the October 2023 deduction.

Whereas, if there have been deductions of £200 a month happening every month for the past year, and all payments are due to holiday pay not having been calculated correctly, then this will most likely to be deemed a “series” of deductions.

It is important to reiterate that this case does not affect the two year backstop. Under the Employment Act 1996, claims can only be brought for deductions over a maximum period of 2 years, and so any deductions extending further than 2 years back will fall outside of this timeframe.

How should holiday pay be calculated?

How holiday pay should be calculated depends on whether the worker has “normal working hours” (i.e. they work the same number of hours each week) and a fixed salary.

Where the worker has normal working hours and a fixed salary

This scenario usually has the most straightforward calculation of holiday pay, in that the worker will be entitled to their basic salary, and overtime hours, bonuses etc will not be taken into account, with the exception of guaranteed/compulsory/regular overtime which is taken into account.

In the case of Chief Constable of Police Service of Northern Ireland v Agnew touched on above, the underpayment of holiday pay resulted because the employees’ compulsory overtime had not been factored into the holiday payments.

Where the worker does not have normal working hours

In these instances, a week’s pay is calculated by taking the average of all remuneration earned in the previous 52 weeks (or, if they have worked less than 52 weeks, then the number of complete weeks the worker has been employed). For the purposes of this calculation, any weeks in which no remuneration was received are ignored, as are any weeks where maternity, paternity, parental, adoption, shared parental, or parental bereavement leave is taken, in which case earlier weeks (i.e. weeks before the 52 week period) are brought into account up, to a maximum of 104 weeks before the relevant date.

Unlike where the worker has normal working hours and a fixed salary, the the calculation of a week’s pay for a worker without normal working hours will include any overtime payments and commission. Therefore, if the worker has carried out overtime or received commission in the past 52 weeks, this must be taken into account when calculating holiday pay.

Where the worker has normal working hours but their pay varies (for example, by reference to the amount of work done)

Similarly to the above, in these cases a week’s pay is determined as their average remuneration over the 52 weeks prior to the calculation date (or the number of complete weeks employed if less than 52 weeks).

The moral of the recent case is that employers should take care when calculating holiday payments, as a series of underpayments for holiday payments, whether deliberate or not, could lead to a build up of underpayments which, if multiplied by multiple employees, could lead to a large claim being brought against the employer.

In fact, in the Chief Constable of Police Service of Northern Ireland v Agnew, it was put forward that limiting the claim to 3 months of underpayments would have cost them about £300k, whereas the cost of meeting the claims in full (as was decided by the Supreme Court in this instance) would be about £30m. This shows how much more damaging the underpayment of holiday pay can now be to employers even before legal costs are considered.

To avoid the stress and claims that could arise from an underpayment of holiday pay, it is better to seek to get it correct the first time. If you have any questions, doubts, or concerns regarding the calculation of holiday pay, or if you need advice to correct previous underpayment issues, please contact a member of our Employment team who will be happy to assist.