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Law & Legal

Supreme Court Opens the Door to Substantial Underpayments of Holiday Claims

It has recently been decided that historical pay claims can be brought where there are gaps of three months or more between periods of underpayment. This ruling has the potential to significantly impact employers’ current way of calculating holiday pay, and could be very costly for businesses. Our employment team has examined what this decision could mean for your organization.

What does this ruling change?

Currently, employees who have been underpaid for holidays must bring an unlawful deductions claim within three months of the underpayment being made. If there is a series of underpayments, employees can bring a claim within three months of the last payment.

However, the recent Supreme Court judgment in Agnew and other v Chief Constable of the Police Service of Northern Ireland and another states that employers will no longer be able to limit their liability for underpaid holiday pay claims.

In this case, the employees of the Police Service of Northern Ireland were paid their basic pay during periods of annual leave. The Supreme Court held that, once the connection between the deductions has been established, ‘… intervals of more than three months did not, in and of themselves and as a matter of law, break the series or bring it to an end.’

Holiday Claims

What does this ruling mean for employers?

Gaps of more than three months will no longer prevent individuals from bringing claims for a series of underpaid holidays. This decision therefore opens the gates for significant claims of underpayment of holiday and employers could be held liable for backdated holiday pay underpayments. This is especially true for employers in Northern Ireland where their liability for underpaid holiday pay could extend back to 1998 (the year the Working Time Regulations were introduced). For example, it has been estimated that this decision could expose the Police Service of Northern Ireland to £30-£40 million of backpay claims.

However, employers’ liability in Wales, England, and Scotland is more limited as a result of the Deduction from Wages (Limitation) Regulations 2014 which impose a two-year limit on unlawful deduction of wages claims brought after 1 July 2015.

What should employers do now?

Employers should look closely at their holiday pay practices and ensure that holiday pay is now calculated factoring in the pay that workers normally receive, which includes regular overtime and commission.