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The Supreme Court has delivered its long-awaited judgment in the case of Chief Constable of the Police Service of Northern Ireland v Agnew. The Court addressed two key issues:

  • Whether claims for underpayment of holiday pay can be brought where there are gaps of three months or more between a “series” of underpayments.
  • Whether annual leave entitlement can be divided into Working Time Directive (“WTD”) days, Working Time Regulations (“WTR”) days and additional contractual leave days, or whether all days of leave must be treated as fractions of a composite whole. 

Although this is a Northern Irish case, the Supreme Court’s judgment sets a binding precedent across the UK. Below, we look at what the judgment means for employers in practice, including the potential risk of new holiday pay claims from employees.

Legal background

By way of legal background, there have until now been certain established principles:

  • Annual leave entitlement is comprised of three elements: four weeks’ leave under the Working Time Directive (“WTD”); 1.6 weeks’ leave under the Working Time Regulations (“WTR”); and any additional contractual leave (if granted by the employer). 
  • Holiday pay for leave taken under the WTD should be based on a worker’s “normal remuneration”, including payments such as overtime, commission and performance-related bonuses (following the decision of the European Court of Justice in Williams v British Airways plc in 2011 and the long line of subsequent case law). Pay for WTR leave and additional contractual leave does not need to include these additional payments. 
  • Workers can bring a claim for unlawful deductions from wages under the Employment Rights Act 1996 (“ERA”) in respect of underpayments of holiday pay. Such claims can cover multiple underpayments if they form part of a "series of deductions" and must be brought within three months of the last deduction in the series.  
  • In the landmark case of Bear Scotland Ltd v Fulton in 2014, the Employment Appeal Tribunal held that there will be a break in a "series of deductions" if more than three months has elapsed between the deductions. A break in the series of deductions will cut off liability for that claim at the point of the break. 
  • Since 2015, a two-year statutory backstop has applied in Great Britain (but not Northern Ireland) in respect of unlawful deductions claims based on a series.  This means that a claim based on a series of deductions in Great Britain cannot go back more than two years before the date of the claim.
  • Claims for underpayments of holiday pay can also be made under the WTR, as long as the claim is brought within three months of the underpayment in question falling due.  It is not possible to claim under the WTR in respect of a series of underpayments, and new claims would need to be filed at three month intervals. 

Facts and Northern Ireland Court of Appeal (NICA) decision

Over 3,300 police officers and 364 civilian employees brought claims against the Police Service of Northern Ireland (PSNI) and the Northern Ireland Policing Board, who had calculated their holiday pay by reference to basic salary only (i.e. without regard to overtime and certain allowances).  The claims for unlawful deductions were brought under the Northern Irish equivalent of the ERA (the Employment Rights (Northern Ireland) Order 1996, known as the ERO) and claims for underpayment of holiday pay under the Northern Irish version of the WTR. 

An industrial tribunal upheld the claims going back to 23 November 1998. The respondents appealed to the Northern Ireland Court of Appeal (NICA), which dismissed the appeal.  

The case was appealed to the Supreme Court, which has today dismissed the appeal. While the NICA’s decision was not strictly binding outside Northern Ireland, the decision of the Supreme Court is binding throughout the whole of the UK.

Key issues

Series of deductions

The Supreme Court concluded that the purpose of the legislation was to protect workers, in particular vulnerable workers, from being paid too little for the work that they do. The purpose of allowing claims to be brought in respect of a “series of deductions” was to provide a measure of protection against the operation of the short (three month) limitation period for bringing claims of unlawful deductions. In other words, a worker who suffers repeated deductions from their wages with the consequence that they are paid too little, not just on one occasion, but on a series of occasions, should be protected.

The Court noted that the legislation does not provide a definition of the word “series”, nor explain how a series may be brought to an end. It agreed with the NICA that “series” is a word with an ordinary meaning; in this context, it means a number of things of a kind which follow each other in time. Whether there is a series of deductions through time is a question of fact in any given case. In order to determine whether there is a series of deductions, all relevant circumstances must be taken into account, including, in relation to the deductions in issue: 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.

The Court agreed with the NICA’s analysis of the alleged series in this case, holding that it could be identified as a series of unlawful deductions “in relation to holiday pay”. Each unlawful deduction was factually linked to its predecessor by the central vice that holiday pay had been calculated by reference to basic pay rather than normal remuneration. A lawful payment of holiday in between two unlawful payments of holiday pay (because the worker did not work any overtime in the relevant reference period such that they were only entitled to basic pay for the specific period of holiday in question) did not interrupt the series. This was because the lawful payment still came about by virtue of the common fault or unifying or central vice that holiday pay was calculated by reference to basic pay rather than normal pay. Accordingly, there was a factual link between all payments of holiday pay dating back to 23 November 1998 when the WTD was implemented in Northern Ireland. 

The Supreme Court rejected the argument that a three month gap between deductions breaks a series, holding that allowing a three month gap to break a series of deductions would lead to arbitrary and unfair results. 

Lawful payments in between deductions did not break the series in this case. However, whether or not a lawful payment in between deductions could break a series in other cases would depend on the nature and reason for the deductions and their connection with the lawful payment.

Is annual leave taken in a particular sequence?

The Supreme Court (agreeing with the NICA) found that the fact that the 1.6 weeks’ WTR leave is described in the legislation as “additional” says nothing about when and how it must be taken relative to other leave to which a worker is entitled. In effect, it rejected the approach suggested in the Bear Scotland case as to the order in which annual leave is used up (i.e. that, by default, the 4 weeks’ WTD leave is taken first in the holiday year, followed by the additional 1.6 weeks’ WTR leave, and finally any additional contractual leave).

The Court concluded that there was no requirement for leave from different sources to be taken in a particular order. In this case, the employer had not distinguished between different types of leave and had paid all holiday pay at the basic pay rate only. In those circumstances, the Court agreed with the NICA that each day of leave must be treated as a fraction of a composite whole or pot, i.e. each day of leave taken is comprised of a portion of WTD leave, a portion of WTR leave and a portion of additional contractual leave. 

However, the Court also stated that the requirement to treat all leave as part of a single, composite pot applied “if and in so far as it is not practicable to distinguish between different types of leave”. It is not entirely clear what the Court meant by this comment, but we think it may be helpful for employers that have been paying different rates of holiday pay for WTD leave and WTR and additional contractual leave – see below.

Implications for employers

Following Williams, we are aware that some employers chose to calculate pay for all holiday by reference to “normal remuneration” for administrative simplicity. However, others chose to distinguish (lawfully) between the different types of leave and pay accordingly. It is these employers (and any who still have not made any changes to their holiday pay arrangements following Williams) who are most likely to be affected by the Supreme Court’s judgment in Agnew.

The respondents in Agnew had paid only basic pay for all holiday and are therefore facing significant liabilities for underpayments. It is important to note, though, that the decision in Agnew does not mean that all holiday must be paid at the rate of “normal remuneration”; that requirement still only applies to WTD leave. 

Despite this, employers that have been paying normal remuneration for WTD leave and lower rates for WTR and additional contractual leave might face claims from employees in light of the Supreme Court’s decision. The employees’ argument would be that their WTR and additional contractual leave ought also to have been paid at a higher rate, as all leave is part of a composite whole. 

However, where an employer pays normal remuneration for 20 days of leave in a year and then pays at a lower rate for the remaining days, we take the view that the employer can argue that it has complied with its obligations. This is on the basis that it is “practicable to distinguish” between the different types of leave and, indeed, that the employer clearly does so by paying in this way. As noted above, the precise meaning of the Supreme Court’s comment about practicability is not clear, as the judgment does not address what such a distinction would look like. For example, it may be that a tribunal would require the employer to have clearly and expressly stated (e.g. in the contract, or a holiday policy) which days of leave are considered to be WTD leave in order for such a distinction to be effective. If the tribunal did accept that such a distinction had been made, the employees would have no claim for underpayment of holiday pay.

Even if such an argument fails, and the tribunal takes the view that the default position applies (i.e. that each day’s leave is a composite of WTD, WTR and additional contractual leave), employers can take some comfort from the fact that, although it may well be subject to challenge, the 2 year backstop still applies in the UK outside of Northern Ireland. The risk in relation to back pay should therefore be limited in practice. 

Risk and action points

The steps employers need to take following this judgment will depend on what their current practice is as regards holiday pay:

  • Employers that pay normal remuneration for all holidays are not at risk of any holiday pay claims based on this case and do not need to take any action in this regard.
  • Employers that, like the respondents in this case, have not paid normal remuneration for any holidays will not be able to look to a lawful payment or three month gap to break a series of deductions. They will be liable for underpayments in respect of all holidays going back two years from the date a claim is filed (longer in Northern Ireland). They should take urgent action to change their approach to holiday pay going forwards. This is important because, while a three month gap between deductions will not break a series, employees must still bring their claims within three months of the last deduction. Paying holiday correctly going forward sets that timer running.
  • Employers that have lawfully distinguished between WTD leave and WTR and additional contractual leave and paid accordingly may face claims based on the “composite pot” argument, as noted above, and should seek advice about how to respond if they do. We would also recommend that they check their documentation to assess how this distinction was communicated to employees, and seek advice as to whether any updates are now needed. 

Wider consequences

The Supreme Court judgment in Agnew is intended to provide much needed clarity in relation to the categorisation of annual leave. However, the adoption of the default position that all leave forms part of a “composite pot” raises further questions, in particular in relation to the rescheduling and carry forward of leave that a worker is unable to take due to sickness, which only applies to WTD leave. 

This further uncertainty increases the need for Government to address the issue of holiday entitlement and pay in legislation. Make UK is continuing to engage with Government on this issue on behalf of our subscribers.

How we can help

If you are a Make UK subscriber, you can speak to your regular adviser for guidance on your approach to calculating holiday pay. Make UK can also assist with defending claims for underpaid holiday pay and engaging with employees and trade unions to address any employee relations issues in this area (please email us for further information).

If you are not a Make UK subscriber, our expert HR and legal advisers can offer guidance on a consultancy basis. For further information, contact us on 0808 168 5874 or email [email protected].

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