Case Update (2):  Holiday Pay and Breaking the Chain

Summary:  Does a gap of more than three months break a ‘series of deductions’ in an unlawful deduction from wages claim?

No, held the Court of Appeal in Northern Ireland (‘NICA’) in Chief Constable of Northern Ireland Police v Agnew available here.

Background:  Under Article 7 of the Working Time Directive (WTD), EU Member States must ensure that workers have the right to paid annual leave.

Although the WTD does not specify how statutory holiday pay should be calculated, European case law has indicated that the UK’s approach to calculating holiday pay is insufficient, on the basis that workers are entitled to receive their “normal pay” for the 4 weeks of WTD leave.  In 2014, in Bear Scotland Ltd v Fulton and Baxter, Hertel (UK) Ltd v Wood and others, Amec Group Limited v Law and others (see our update here), the Employment Appeal Tribunal (EAT) held that:

• Payments made in respect of overtime that an employee was obliged to work, but the employer was not obliged to offer, must be included in the calculation of holiday pay; and
• Great Britain’s Working Time Regulations (WTR) (and, by analogy, the WTR NI) were capable of being interpreted so as to give effect to this requirement.

Importantly, the EAT also held that:

• Employees could only bring claims for unlawful deductions from wages in respect of a “series” of underpayments where the gap between the deductions was 3 months or less (the 3-month rule); and
• The WTD 4 weeks leave will be deemed to be taken before the additional 1.6 weeks’ leave. (The upshot of this was that historical liabilities will often fall away towards the end of the holiday year because a 3-month gap is likely to occur in the period between the final (20^th) WTD leave day in one holiday year and the 1st WTD leave day of the next holiday year).

Although the EAT in Bear Scotland granted permission to appeal the 3-month rule, none of the parties chose to do so. However, when the same case later returned to the Scottish Employment Tribunal, the employees argued that the 3-month rule might not be binding, was wrongly decided or only created a strong presumption rather than a binding rule. However, both the Scottish Employment Tribunal and the Scottish EAT upheld the UK EAT’s interpretation, holding that the only way that a new EAT could reach a different decision on this point would be if an established exception applied. This meant that the 3-month rule became a binding precedent which would be followed by Employment Tribunals and the EAT in the future (save where an exception applies permitting departure, which seemed unlikely).

Facts:  Between 2015 and 2016, claims were issued on behalf of 3,380 police officers and 264 civilian employees employed by the Police Service of Northern Ireland (PSNI) who had only received basic pay during their holidays. The claims amounted to an estimated underpayment of approximately £30 million, but the PSNI relied on the 3-month rule established in Bear Scotland to argue that the underpayments amounted to only approximately £300,000.

However, the Northern Ireland Industrial Tribunal (NIIT) upheld the claims, considering that the EAT had been wrong to find that a gap of three months or more would automatically break a “series of deductions” for the purposes of a holiday pay claim. The PSNI appealed, and the case was referred to the Court of Appeal in Northern Ireland (NICA).

The NICA held that whether there is a series is a question of fact to be decided in each case. A series does not mean that each deduction occurs at exactly the same time interval and that provided it happens with sufficient frequency of repetition it can occur at different time intervals and for different amounts.

The NICA considered it was necessary to identify the alleged series – in this case it was a series of unlawful deductions in relation to holiday pay. Each unlawful deduction was factually linked to its predecessor by the common fault or unifying vice that holiday pay was calculated by reference to basic pay rather than normal pay.

The NICA held that a series is not ended, as a matter of law, by a gap of more than three months between unlawful deductions or by a lawful payment i.e. where the employees were paid appropriately while at work between the various holiday payments.

The NICA also looked at whether annual leave should be taken in any particular sequence as suggested in Bear Scotland i.e. with the four weeks under the WTD to be taken first with the intention of increasing the chance of a gap of more than three months between the underpayments of holiday pay and a breach of a series. It disagreed with this reasoning and did not consider there was any requirement that leave from different sources is taken in a particular order.

Implications:   Although this decision is not binding on the Tribunals in Great Britain, it will be persuasive authority for any future appeal against the reasoning in the EAT’s decision in Bear Scotland. More concerning, is that if there is an appeal to the Supreme Court, which seems likely given the amounts involved, any decision will be binding on employers in Great Britain and may bring an end to the 3-month rule.

The good news for employers in Great Britain is that at least the 2 year cap on backdated claims for unpaid holiday pay (introduced by the Government in July 2015) remains untouched which will continue to significantly limiting liability.