Employment Law E-Bulletin – Issue 91
- Chief Constable of the Police Service of Northern Ireland and another v Agnew and others (Northern Ireland)  UKSC 33 – historical underpayments of holiday pay are not automatically broken by making an appropriate payment or by a gap of more than three months between underpayments
- The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 – Changes to holiday rules
Chief Constable of the Police Service of Northern Ireland and another v Agnew and others (Northern Ireland)  UKSC 33 – historical underpayments of holiday pay are not automatically broken by making an appropriate payment or by a gap of more than three months between underpayments
In October, the Supreme Court in Northern Ireland ruled that historical underpayments of holiday pay are not automatically broken by the making of an appropriate payment or a gap of more than three months between underpayments.
Thousands of police officers and hundreds of civilian workers brought claims under Northern Ireland provisions equivalent to the Employment Rights Act 1996 (unlawful deductions from wages) and Working Time Regulations 1998 (calculation of holiday pay) on the basis that the employers had calculated their statutory holiday pay using basic pay only as opposed to normal pay (to include overtime).
The employers admitted to the incorrect calculation but sought to limit the claims, arguing that the claimants could not rely on a series of payments if any two of those were broken by more than three months. In support of their argument, the employers submitted that annual leave should be deemed to have been taken in a particular order i.e. that derived from EU law (4 weeks) first, followed by additional leave (1.6 weeks), thereby interrupting a series of underpayments.
The Supreme Court ruled that a series of underpayments is determined by whether the payments are linked and this is a question of fact to be determined based on ‘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.” It determined that the underpayments were linked because they all arose from the same incorrect calculation.
The Supreme Court rejected the argument that different types of statutory leave can be deemed to have been taken in a particular order (unless there is a contractual provision stating this) and also considered the correct calculation of holiday pay which includes an element of overtime, ruling that the calculation of the overtime element should be based on the number of working days within the holiday reference period (and not the number of calendar days).
Points to note:
Although this is a Northern Ireland decision, it is binding on Employment Tribunals in England and Wales, who will not be bound by the limitations of the Bear Scotland case in respect of determining a series of underpayments for claims of unlawful deduction from wages under the Employment Rights Act 1996.
This means employees may be able to claim for underpayments going back further than originally thought if they are able to prove that several underpayments (whether or not broken by a gap of more than three months) are factually linked.
The good news for employers in England and Wales is that the impact of this is mitigated by the Deduction from Wages (Limitation) Regulations 2014, introduced by the Government following Bear Scotland, which places a two-year backstop on any claims brought on or after 1 July 2015.
Employers are advised to check their holiday pay calculations, particularly where they operate multiple pay elements including overtime, to ensure that they avoid claims such as this, as well as their contractual holiday pay clauses.
The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 – Changes to holiday rules
In its response to its consultation on reforms to the Working Time Regulations 1998 (“WTR”), the Government has published draft regulations which are due to come into force on 1 January 2024. These are the most substantive amendments to the WTR since publication. The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 provide for the following:
Irregular-hours and part-year workers – the introduction of a statutory definition of two new types of workers, either or both of which will likely cover most types of casual, variable hours and term-time workers. It also introduces new detailed provisions relating to entitlement to annual leave and calculation of holiday pay for these types of workers:
- In a reversal of the post-Brazel calculation of holiday entitlement for part-year workers, annual leave entitlement will be calculated using an accrual rate of 12.07% of hours worked in each pay period, rounded up or down to the nearest hour and up to a maximum accrual of 28 days of annual leave in any leave year.
- Where a worker takes a period of sick or statutory leave (e.g. family related leave), they will continue to accrue annual leave during the period of absence. However to determine annual leave accrued during the absence, the accrual rate of 12.07% is applied to an average of weekly working hours based on 52 weeks ending the day before the worker started the sick or statutory absence.
- Rolled-up holiday pay will become permissible again, having previously been ruled unlawful by the European Court of Justice in 2006. It will be calculated using the 12.07% accrual rate on hours worked in each pay period, must be paid at the same time as the pay for the work done and must be shown separately on pay slips.
Carry over of statutory annual leave – the changes codify in domestic legislation the effect of retained European case law. The entitlement to annual leave of 4 weeks deriving from the EU Working Time Directive (“EU leave”) and the entitlement to 1.6 weeks additional leave pertaining to the UK via the WTR will continue to be treated differently as the Government decided against combining the two. Thus, for any leave year starting on or after 1 April 2024:
- If any of the full 5.6 weeks’ leave cannot be taken in the year it is accrued due to a period of maternity or other statutory leave, it may be carried over into the following leave year and must be taken before the end of that year.
- If any EU leave cannot be taken in the year it is accrued due to a period of sickness absence, it may be carried over into the following leave year and taken within 18 months from the end of the year when the leave was accrued.
- Workers will also be able to carry over any untaken portion of EU leave into the following year if an employer (1) fails to recognise their statutory right to holiday and holiday pay or (2) fails to give them the opportunity to take their leave entitlement as accrued in the leave year or (3) fails to tell them that they would lose their holiday entitlement if they did not take it in full in the leave year it is accrued.
- Similar provisions apply to the full leave entitlement of irregular hours and part-year workers, calculated as described above.
- The new legislation revokes the Working Time (Coronavirus)(Amendment) Regulations 2020 which relaxed the original carry over rules as a result of the pandemic.
‘Normal pay’ for the purpose of calculating holiday pay – some clarity is provided in the legislation as to elements of pay which must be included in calculating normal pay for the purpose of the EU leave only (basic pay only remains in respect of the 1.6 weeks additional leave). This will now include the following:
- Payments intrinsically linked to the performance of contractual tasks (including commission payments).
- Payments relating to professional or personal status relating to length of service, seniority or professional qualifications.
- Other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.
Record Keeping Requirements – the requirement for employers to keep records documenting compliance with the WTR remains. However, the administrative burden of doing so is reduced by allowing discretion as to whether and how each worker’s daily working hours are recorded, so long as an employer is able to show its compliance without such records.
Points to note:
This will provide some good news for employers, particularly in sectors where casual and/or term-time workers play a key role, for example education, care and leisure. The clarity on the calculation of holiday entitlement and the ability to lawfully operate rolled up pay will simplify the administration of holiday pay in the long run.
The calculation of holiday pay as stated in the new legislation will go some way to assist employers in calculating pay correctly and thus avoiding any unnecessary claims for underpayment of holiday pay. There remains room for interpretation of the definition of payments specified and so it will be important for employers take advice if in doubt as to whether, for example, certain payments are ‘intrinsically linked’ to the performance of the contract or how and when overtime payments should be deemed as ‘regularly paid’.
In terms of the carry over provisions, the full changes are linked to leave years starting on or after 1 April 2024. Any carry over of leave accrued in line with the old drafting will be covered by transitional provisions, which indicate that such leave must be taken before 31 March 2024. Employers may face initial difficulties if their holiday year runs from a date other than 1 April.
Employers may need to review their existing contracts to ensure that they remain compliant with and reflect these changes, particularly for workers who will be covered by the irregular hours and part-year workers provisions.
If you would like to discuss any of these changes or would like specific advice relating to your business or contracts, please contact a member of the Employment Team.