Supreme Court agrees that employees can claim for historic underpayments of holiday pay

The Supreme Court has agreed with the Northern Ireland (NI) Court of Appeal that employees can claim for historic underpayments of holiday pay even if there are gaps of more than three months between deductions. This is a very significant decision and the practical impact is that this could make it much easier for workers to recover historic underpayments of holiday pay from their employers. 

The three-month break in deductions ‘rule’ has applied since the Employment Appeal Tribunal decision in Bear Scotland v Fulton in 2014. This had been an extremely important case as it confirmed that holiday payments had to be based on ‘normal’ pay rather than contractual pay for at least the first four weeks’ leave of the year (as that was a requirement of the EU Working Time Directive which the UK Working Time Regulations 1998 had implemented). 

Up until this point, there had been disputes as to whether an employee would be entitled to anything more than basic pay when on holiday. The Bear Scotland decision in 2014 meant that in calculating holiday pay, employers would have to take into account average overtime, commission and other work-related enhancements leading to the prospect of large pay-outs and potential financial ruin for some.

However, in finding that a gap of three months would break a series of deductions, the amount that could be successfully claimed from employers in the Employment Tribunal was, in effect, limited to just the shortfall in holiday pay over a relatively recent period. It was good news for employers but there have since been a number of passing comments from the judiciary to the effect that the EAT ruling on this point may not have been correct.

The Supreme Court has now confirmed this, and it will no longer apply as a default rule in assessing when a series of deductions has ended. Therefore, employees in GB can now potentially claim for underpayment of holiday pay going back over a maximum period of two years, even if there is a break of more than three months between each deduction. 

However, in Northern Ireland, this decision has the potential to have a much more wide-reaching impact. This is because the two year back stop does not apply in NI so employees can potentially claim for holiday pay going back to when the working time regulations were brought into force. It has been reported that the Police Service of Northern Ireland is likely to face a large holiday back pay bill in the region of £30m. 

Going forward, the Employment Tribunals in GB and the Industrial Tribunal in Belfast will have to take into account all the circumstances to assess whether a series of deductions is continuing or if it has been broken. A long gap between deductions may suggest that there has been a break, but it will be down to the particular facts of the case. The circumstances for the Tribunals to take into account in relation to the deductions in issue are: 

• their similarities and differences; 
• their frequency, size and impact; 
• how they came to be made and applied; 
• what links them together; and 
• all other relevant circumstances.