NI employers remain liable for higher holiday pay costs

In a landmark ruling the Court of Appeal (CA) yesterday upheld an Industrial Tribunal (IT) decision that police officers and civilian staff are owed substantial back pay in respect of underpaid holiday pay. (Alexander Agnew & Others v Chief Constable for the Police Service of Northern Ireland & Others [2019] NICA 32)

The original decision of the IT caused shockwaves amongst Northern Irish employers and employment practitioners when it found that the controversial decision in Bear Scotland v Fulton [2015] CMLR 40 was wrong to find that a gap of three months or more would automatically break a 'series' of deductions for the purposes of a claim for holiday pay.

Instead, the IT held that the existence of a 'series' should be assessed on a case by case basis and should not be automatically broken by a three month gap – or, indeed, gaps relating to absences for maternity leave, maternity and disability related illnesses or personal choice.  Upholding the findings of the IT, the CA held that "a series is not ended, as a matter of law, by a gap of more than 3 months between unlawful deductions nor is it ended by a lawful payment", and to do so would lead to "arbitrary and unfair results."

Other notable points that arose from the IT original decision were as follows.

What is the correct reference period?

The fixing of an arbitrary reference period for the purposes of calculating holiday pay, twelve weeks being commonly used by many employers, was incorrect, and instead should be determined by reference to each individual claimant, and "be long enough to be representative of the claimant's working pattern." The IT had given a non-binding suggestion that a twelve month reference period was appropriate in this case. At the CA, lawyers for the PSNI argued that such an approach should not have been adopted, and that different reference periods could apply to different claimants depending on their circumstances. The CA agreed that the reference period is fact sensitive in each case, and encouraged the parties to "agree a pragmatic, administration-friendly method for calculating and paying 'normal pay'."

Are different types of leave taken in a particular 'order'?

The Bear Scotland case considered two types of leave:

1. twenty days 'European' leave: the minimum to which workers are entitled under the Working Time Directive; and
2. additional 'domestic' leave, under the Working Time Regulations, which goes beyond the minimum required by the Working Time Directive.

In Bear Scotland it was decided that it could be assumed that the first twenty days of annual leave is 'European leave' and those holiday days that followed would be 'domestic leave', plus any additional contractual entitlement.  The CA in Agnew disagreed, and held that the twenty days 'European leave', the eight days 'domestic leave' and the two additional days contractual leave were, in fact, indistinguishable from one another. According to the CA, each day of leave should be distributed proportionately among the different sources of leave. Applying the approach in the Bear Scotland decision would inevitably increase the chances of creating a break of three months or more between underpayments of holiday pay. Upholding the original findings of the IT, the CA held that "a worker has an entitlement to all leave from whatever source and there is no requirement that leave from different sources is taken in a particular order."

What is the correct reference period?

The Appellant officers and civilian staff had cross appealed the IT's finding that holiday pay should be calculated by reference to 365 days, being calendar days, rather than working days (260) or actual days worked. Allowing the appeal, the CA held that it was "wrong in principle to use 365 as a divisor to 20 working days" as a means of achieving the objective of ensuring that a worker receives 'normal pay' as holiday pay, as it was taking both working and non-working days and applying it as a divisor to working days only. In practical terms, the CA's finding on this issue could see the total settlement bill increasing from £30 to £40 million.

Points to note

The CA's decision leaves the PSNI facing a £40 million bill in respect of underpayment of holiday pay. It also leaves open the realistic prospect that employees in Northern Ireland could pursue holiday back pay claims as far back as the introduction of the Working Time Regulations in 1998, as the two year backstop on the ability to claim holiday back pay does not extend to Northern Ireland.

The decision does, however, only apply to the twenty days of 'European' leave entitlement. However, the administrative burden of apportioning different payments for different categories of leave means that many employers will choose to apply the same principles for calculating holiday pay across all types of leave, regardless of whether it is 'European' leave, 'domestic' leave or a discretionary contractual entitlement.

In both the decisions of the IT and the CA, there was criticism of the Chief Constable for the continued practice of calculating holiday pay by reference to basic pay, despite the high profile decisions of the CJEU in September 2011 (Williams and others v British Airways plc C-155/1) and the subsequent Bear Scotland decision, in 2014. Up until recently, Tribunals may have had a degree of sympathy for the fact that employers had wrongly believed they were calculating holiday pay correctly. However, given the significant amount of high profile judicial direction and publicising of this subject in recent years, employers can no longer afford to hide behind a lack of knowledge. Employers should, therefore, be taking proactive steps to ensure that holiday pay is being properly calculated.

It is unknown at this time if the PSNI will seek to further challenge the decision through the Supreme Court, but given the level of the potential liability for the PSNI and the wider ramifications of the decision for NI employers, it is very likely that permission to appeal will be both sought and allowed.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.