UK: Supreme Court rules that three month gap does not automatically end series of deductions, increasing scope for historic holiday underpayment and other deduction claims

The Supreme Court has ruled that workers can bring a 'series of deductions' claim for underpaid holiday (or other types of deductions from wages) notwithstanding a three month gap in between deductions.  Workers may have historic underpayment claims, for example, if they only received basic pay for the 4 weeks' EU-derived statutory holiday rather than the required 'normal remuneration', which case law has established must include pay for compulsory overtime, sufficiently regular voluntary overtime and results-based commission.  Such claims may now be able to look back two years in Great Britain, while in Northern Ireland they could theoretically go back to 1998.  (Chief Constable of the Police Service of Northern Ireland v Agnew)

Deduction from wages claims must be brought within three months from the relevant deduction (ie, underpayment), or from the last in a series of deductions.  The EAT in Bear Scotland v Fulton ruled that a gap of more than three months between deductions breaks the series, but the Northern Irish Court of Appeal in Agnew disagreed in a judgment that was not binding in Great Britain.  The Court of Appeal in Pimlico Plumbers made clear (obiter) that it agreed with the Northern Irish Court and, as expected, the Supreme Court has now taken the same view. It held that:

• whether deductions form a series is essentially a question of fact to be determined bearing in mind all the relevant circumstances.  These include the similarities and differences of the deductions; their frequency, size and impact; how they came to be made and applied; and what links them together.
• it is not necessary for there to be a contiguous sequence of deductions of a particular kind.  The fact that there is one lawful payment in the middle of a series will not necessarily break the series, nor will a contiguous sequence necessarily be a series - it will depend on the nature and reason for each of the deductions and whether and, if so, how any lawful payment has anything to do with them.
• in this case, each unlawful deduction was factually linked to its predecessor by the 'common fault or unifying vice' that holiday pay was calculated by reference to basic pay rather than normal pay inclusive of overtime pay.  The intervening holiday payments which were lawful (because there was no overtime worked in the reference period) did not of themselves interrupt that series of deductions (as the unlawful method of calculation remained unchanged).  Neither did it matter that the interval between the underpayments was sometimes in excess of three months.
• it was not correct that a worker is to be treated as taking his EU-derived 4 week leave entitlement first in the leave year, followed by the domestic 1.6 week entitlement (to which the 'normal pay' requirement does not apply). This argument had been run because it would increase the occurrence of gaps of more than three months between underpayments.  Although this was no longer relevant given the first part of the ruling, the Court held that, if and in so far as it is not practicable to distinguish between different types of leave, then all the leave to which the worker is entitled must form part of a single, composite pot.  The reference to practicability suggests that employers may still specify contractually that the 4 weeks' leave is taken first - which will be prudent if the employer treats the two types of leave differently, for example in terms of permitted carryover or by only paying basic pay for the 1.6 week entitlement.

GB domestic rules limit deductions claims for underpayment of holiday to two years’ back pay in respect of claims issued on or after 1 July 2015.  However, there has been speculation that this rule too could be challenged on the basis that it breaches EU principles requiring an effective remedy for breaches of EU rights (although these principles are disapplied with effect from 1 January 2024) or possibly using rights under the European Convention of Human Rights.  The implications of the ruling are greater in Northern Ireland, where there is no backstop and claims could go back to 1998.  The risk of significant historic holiday pay claims is particularly relevant to gig economy employers, and others with atypical staff, who have potentially mis-categorised those staff as self-employed rather than workers and so denied any paid holiday entitlement.

While this ruling has settled one point of uncertainty about statutory holiday rights, there may be further change on the horizon  - the Government recently consulted on possible reform (including potentially joining the 4 week and 1.6 week entitlements into one and changing the 'normal remuneration' requirement) as noted here.