Underpaid holiday pay – where are we now?
Employees are entitled to 4 weeks annual leave, deriving from the Working Time Directive, and 1.6 weeks additional leave, deriving from the Working Time Regulations. A number of recent cases have clarified what should be included in the calculation of holiday pay. The general principle is that holiday pay for the 4 weeks entitlement should be calculated by reference to an employee’s ‘normal pay’, rather than basic pay, which can include overtime. If an employee is underpaid for their holiday, they can bring a claim in the Employment Tribunal for unlawful deduction from wages.
A claim for unlawful deduction from wages must be issued within three months from the date of the deduction. Where there is a series of deductions, the claim must be made within three months of the last deduction.
Police officers and civilian staff of PSNI were paid holiday pay based on their basic pay, without including overtime that was regularly worked and without including certain allowances. Over 3,300 officers and 364 civilian staff issued claims for unlawful deduction from wages, arguing that they were underpaid because they should have been paid ‘normal’ pay, not just basic pay when they were on holiday.
The claim has now been considered by the Supreme Court (SC). It was accepted that calculating holiday pay based on basic pay, instead of normal pay, was an unlawful deduction from wages for the 4 weeks annual leave.
Remedy for underpayment of holiday pay
The issue was how far back the employees were entitled to go with their claim to recover that underpayment. The employees’ claims went back to November 1998. The employer argued that in Northern Ireland the claim can only be for payments made in the three months before the claim is brought. This would limit the amount that the employees could claim, which the employer calculated would be around £300,000. The employees argued that they could claim underpayments from a series of payments, as long as the claim was brought within three months of the last payment. The employer calculated this would cost around £30 million. The SC found in favour of the employees on this point.
Does a gap of three months break the chain of a series of deductions?
The SC also considered what is meant by a series of unlawful deductions and when such a series ends. In particular, whether a series of deductions ends if two payments are separated by a gap of more than three months, or if a correct payment is made.
The SC found that whether there has been a series of deductions is a question of fact in each case. However, in this case each underpayment was linked by a common fault that holiday pay had been calculated based on basic pay only. The SC therefore found that there was a series of deductions. The SC found that a gap of more than three months between deductions did not bring the series to an end. In addition, one correct payment of holiday pay did not break a series if the correct payment was calculated based on basic pay only.
The general position is that employees’ pay during their statutory holiday should be comparable to their pay when they are at work. In this case, the employees’ statutory holiday pay had been calculated without including overtime. The SC found that there was a series of deductions, and a gap of three months did not interrupt the series of deductions. The employees could claim for underpaid holiday pay since November 1998.
The position in Great Britain is different because claims for underpaid holiday pay are limited to two years. This is often referred to as the ‘two-year backstop’. This limits the amount that can be claimed in Great Britan, even where there is a series of deductions in respect of underpaid holiday pay.
19 October 2023
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