Holiday Pay after Agnew: ten key issues for employers
The Northern Irish Court of Appeal has handed down its eagerly anticipated decision in The Chief Constable of the Police Service of Northern Ireland & Northern Ireland Policing Board -v- Alexander Agnew & Others. An appeal from the Industrial Tribunal, this case involves claims raised by 3,380 police officers and 364 civilian staff in relation to the alleged failure of both the PSNI and Policing Board to calculate their holiday pay with reference to “normal pay”. It follows a rich vein of cases, most notably the EAT’s decision in Bear Scotland in 2015, which has made the calculation of holiday pay a major concern for employers.
Part of the confusion in this area is caused by a lack of legislative guidance and the interaction between the different rights granted under European and domestic law. Whilst Bear Scotland dealt admirably with a number of issues, a number of crucial ambiguities remained undecided. The core principles distilled by our European and domestic courts are that workers are entitled to be paid their normal pay during periods of annual leave, and that “normal pay” is not limited to basic pay but could include elements such as overtime, commission and allowances. Failure to properly calculate holiday pay could be an unlawful deduction from wages, which might be linked in a “series of deductions” occurring throughout the employment relationship.
Since Bear Scotland, there has been significant uncertainly over how a series of deductions is broken, whether different sources of annual leave are separable (i.e. the 20 days under European law, the 5.6 weeks under our domestic law and any further contractual entitlement), how the amount of overtime taken into account in holiday pay should be calculated and over what period of time the calculation should be made to determine what an employee’s normal pay is (“the reference period”).
Whilst Agnew is the latest case in a complex, developing body of jurisprudence, we can extract ten key considerations for employers:
- Whether or not there is a series of deductions from pay is a question of fact to be decided in each case. Deductions which are sufficiently similar and “factually linked” together “in the alleged series” may form a series of deductions.
- This “factual link” approach could allow the Court to trace the series of unlawful deductions back to 23 November 1998, when the Working Time Regulations (NI) 1998 came into force.
- The Court did not consider the unique implications for employers in Northern Ireland, where the two-year cap on retrospective unlawful deduction from wages claims established in Great Britain in 2014 does not apply.
- Departing from Bear Scotland, the Court decided that a three-month gap between unlawful deductions will not break the series of deductions.
- Similarly, a lawful payment will not automatically break the series either. Although providing basic pay instead of normal remuneration may occasionally result in the correct holiday payments being made, a series of deductions will not necessarily be broken by a lawful payment.
- The Tribunal was incorrect when it used a divisor of 365 days in a 12-month reference period as the method of calculating the amount of overtime to be taken into account. The correct divisor will usually be 260, being the total working days in that reference period for a full-time employee who works five days a week.
- The Court of Appeal declined to rule on what would constitute the correct reference period for assessing the “normal pay” of an individual without any particular considerations to account for, such as a period of maternity or sickness absence.
- The correct reference period must be decided in each case. Like the Tribunal, the Court suggested that a “pragmatic” and “administration friendly” approach might be to adopt a rolling 12-month reference period ending immediately before the period of leave.
- Employers cannot separate annual leave originating in one source from another. A worker’s entitlement is “indistinguishable”, meaning leave taken is drawn proportionately from a worker’s European, domestic and contractual entitlements.
- In Bear Scotland and Lock, it was accepted that an employer must only pay normal remuneration during the annual leave provided under European law (i.e. 20 days). It is unclear how employers can ascertain these 20 days without distinguishing between sources of annual leave.
This is a complex and developing area of law which is subject to change. We would be delighted to provide further detail on the Court’s decision in Agnew and how it may affect your business.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.