Colin Godfrey: Supreme Court ruling on unlawful wages deduction from unpaid or underpaid holiday pay

Earlier this month, the Supreme Court handed down its judgment in the important case of Chief Constable of Northern Ireland v Agnew. In a judgment that will be welcomed, the Supreme Court has determined that, in a claim by an employee for an unlawful deduction of wages arising from unpaid or underpaid holiday pay, a series of deductions will not be broken by a gap of three months or more.

The right to holiday pay, and the basis of its calculation, has been a topical issue for several years. It can be a highly technical and complex area, particularly for employees with variable hours and rates of pay. It is not uncommon to find that errors are made such that individuals are underpaid for periods of holiday, and that those underpayments have subsisted over a lengthy period of time.

Individuals may not realise they have been underpaid for periods of holiday, but when they become aware of it may wish to claim for all underpayments. This will usually be as a claim for an unlawful deduction from wages. Except in cases where an individual has been denied the right to paid leave at all, there is a statutory two-year backstop for those claims.

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In addition, since the Employment Appeal Tribunal’s 2017 decision in Bear Scotland and others v Fulton and others, a series of deductions will be broken by a gap of more than three months. This significantly reduced the scope for claims for potentially significant but historic underpayments to be recovered, because a single instance where holiday pay was paid correctly would break the series.

The Northern Ireland Court of Appeal decision in Agnew reached the opposite decision to Bear Scotland, deciding that a series of deductions would not be interrupted by a gap of more than three months. This was, however, a decision applicable to Northern Ireland and was, therefore, not binding in other parts of the UK.

The Supreme Court’s decision has now brought the rest of the UK into line with this judgment. This means that gaps of more than three months will no longer prevent individuals bringing claims for a series of underpaid holidays. It will still be necessary to establish that there has been a series of deductions, which will depend on whether they are sufficiently similar, but this decision potentially opens the way for significant claims for underpayments over a two-year period.

It underscores the importance of getting the calculation of holiday pay right, including understanding what constituent elements of pay need to be included in the calculation.

Colin Godfrey is an employment lawyer at Taylor Wessing