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The Supreme Court case could cause holiday pay headache for businesses

The ‘Agnew’ case being heard in the Supreme Court this week could have significant implications for how businesses approach holiday pay and historic claims of underpaid holidays

In recent years, there has been a raft of cases dealing with holiday entitlement and pay including a departure from the age-old 12.07% accrual formula.

These have already been causing a headache for businesses and HR professionals who are having to revise or reassess their holiday practices including how holiday pay is calculated.

Now another landmark case is being heard in the Supreme Court this week (14th – 16th December) that could make it easier for workers to claim in respect of historic underpayments of holiday pay and make it harder for employers to work out what rate of holiday pay should be paid.

Lesley Rennie, Principal Employment Law Solicitor at WorkNest explains: “The case of, Chief Constable of the Police Service of Northern Ireland and another v Agnew and others, being heard now in the Supreme Court potentially has significant ramifications for businesses in the UK.

“It is expected that the case will deal with two key points. Firstly is, how far back an unlawful deduction from wages claim in respect of holiday pay can go. Currently, a claim must be brought within three months of the deduction (the incorrect payment of holiday pay) or within three months of the last deduction in the case of a series of underpayments.

“Until recently, employers could take comfort from the Employment Appeal Tribunal’s decision in Bear Scotland Ltd v Fulton and another, that a gap of more than three months between incorrect payments of holiday pay would break any series of deductions.  This mitigated the potential financial liability for employers as workers couldn’t link historic underpayments where they were separated by more than three months or correct payments of holiday pay.

“This however is now thrown into doubt by the Agnew case. Whilst this is a Northern Irish case, the Supreme Court’s decision will be binding throughout the UK.  That means that Employment Tribunals in Scotland and England will have to follow it.

“Agnew firmly disagreed with the Bear decision, finding that a series of unlawful deductions from wages is not broken by there being more than three months between deductions and that a correct payment of holiday pay does not break the series. The Court of Appeal’s recent comments in Smith v Pimlico, may give some indication of where the Supreme Court may land on these points expressing a strong provisional view that Agnew was correct.  If this is the case, an employer’s potential liability for historic underpayments will be greatly increased, although there is generally a two-year limitation on claims in Scotland and England.

“The second point is whether any given holiday day can be described as being solely Working Time Directive (WTD) leave or solely Working Time Regulation (WTR) leave, or if it is a combination of all leave.

“If the Supreme Court opts to follow the reasoning of the Court of Appeal in the Agnew case – which was that any holiday day is a combination of all types of leave – this will create a real practical problem for businesses. Pay for WTD leave days must reflect normal remuneration so it must take into account things such as commission, allowances and overtime. If we must distinguish between WTD and WTR leave, businesses would need to carry out complex calculations to work out what element of each makes up a holiday day and pay it accordingly or apply a blanket approach of paying all holiday days at the rate of “normal remuneration. Neither approach is particularly attractive.

“Depending upon the outcome of Agnew, businesses that have been keeping with the basic rate of pay for WTD leave could end up on the sharp end of far-reaching claims for unlawful deduction from wages.

“It’s not known yet when in 2023 a ruling will be made but ahead of a judgement, organisations can, and should act. Businesses should review their holiday practices now to ensure that WTD leave is paid at normal remuneration going forward and assess whether there have been any underpayments within the last two years.”

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