Megan Parker: Could employers be obliged to pay back historical holiday underpayments?

holiday Megan ParkerAs of now, if an employee’s holiday is incorrect, they must bring a claim forward within three months of when the deduction was made, or if a string of underpayments has been made, within three months of the last time they were underpaid for their holiday.

However, this system may be scrapped altogether due to the ongoing Supreme Court case of Chief Constable of the police service of Northern Ireland (PSNI) and another v. Agnew and others. If the Supreme Court rules in favour of the staff members of the PSNI, then it could lead to many employers across the UK having to pay back historical claims for holiday underpayment going back years.

The case was brought to the Supreme Court by PSNI against the Court of Appeal in NI (NICA), which ruled in favour of PSNI staff that if past underpayments could be factually linked then it could form a series over time, even if they were more than three months apart.

It was submitted that each deduction would require a sufficient similarity of subject matter, so that each underpayment is factually linked with the next in the alleged series in the same way as it is linked with its predecessor. While it is not clear right now which factors must be present for an underpayment to be factually linked with the next, in this case each unlawful deduction with PSNI staff was factually linked to its predecessor by the central issue that holiday pay had been calculated in reference to basic pay, rather than normal pay. That method of calculation factually linked all payments of holiday pay consistently since November 1998. The Supreme Court will decide whether it agrees with NICA’s ruling.

The crucial element in this ruling is what it means for historic underpayments to be linked together over time. If the Supreme Court does agree with NICA’s judgement, what will that mean for other employers across the country?

If the Supreme Court were to rule that employers must make paybacks for holiday underpayment going back several years, it would have significant financial and operational implications. Beyond the obvious financial burden of having to pay back employees in any historical disputes, it would require a huge administrative undertaking too. Employers would need to conduct a review of all their payroll records and holiday pay policies to ensure they comply with the ruling, and to calculate the amount of underpaid holiday pay they owe to each employee, past and present. This could involve calculating whether historical holiday pay was done using basic pay rather than normal pay.

Another complication is the potential for any reputational damage and breakdown in employee relations. Employees may become dissatisfied and upset from being historically underpaid while on holiday, leading them to feel short-changed for the work they have contributed to the company.

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The decision from the Supreme Court is not due until later in 2023, which makes it more important that employers act now ahead of any ruling. A prudent idea would be to start checking if there are any claims for underpayment of holiday by staff members, and whether this needs communicating across the business. Calculating potential back pay now will also place organisations in a better financial position as they will be prepared for any financial impact. By taking action now, this will reassure employees that their employer cares about the outcome of the case and are taking steps to address any previous discrepancies and future questions about holiday pay calculations.

Megan Parker is a trainee solicitor at Napthens Solicitors