Could employers be obliged to pay back staff for historic holiday underpayments?

The ongoing case of Chief Constable of The Police Service of Northern Ireland and another v Agnew and others by the Supreme Court could deem Company’s liable for years of unpaid holiday pay.

Under current law, if an employee’s holiday pay is incorrect, they must bring a claim forward within three months of when the deduction was made or, if a string of underpayments has been made, within three months of the last time they were underpaid for their holiday.

However, this system may be scrapped altogether as a result of the ongoing Supreme Court case of Chief Constable of The Police Service of Northern Ireland and another v Agnew and others. If the Supreme Court rules in favour of the staff members of the police service in NI (PSNI), it could lead to many employers across the UK having to pay back historic claims for holiday underpayment going back years. 

The case was brought to the Supreme Court by PSNI against the Court of Appeal in NI (NICA). NICA ruled in favour of PSNI staff, deciding that, if past underpayments could be factually linked, then it could form a series over time, even if they were more than three months apart. 

It was submitted that each deduction would require a sufficient similarity of subject matter, such that each underpayment is factually linked with the next in the alleged series, in the same way as it is linked with its predecessor. 

While it is not clear right now which factors must be present for an underpayment to be factually linked with the next, in this case, each unlawful deduction with PSNI staff was factually linked to its predecessor by the central issue that holiday pay had been calculated in reference to basic pay, rather than normal pay. That method of calculation factually linked all payments of holiday pay consistently since November 1998. The Supreme Court will decide whether it agrees with NICA’s ruling.

What does this mean for employers?

The crucial element in this ruling is what it means for historic underpayments to be linked together over time. If the Supreme Court were to rule that businesses must make paybacks for holiday underpayment going back several years, it would have significant financial and operational implications for many employers. 

Beyond the obvious financial burden of having to pay back employees in any historic disputes, it would require a huge administrative undertaking too. Organisations would need to conduct a review of all their payroll records and holiday pay policies to ensure they comply with the ruling, and to calculate the amount of underpaid holiday pay they owe to each employee – past and present. This could involve calculating whether historical holiday pay was done using basic pay rather than normal pay.

Another complication is the potential for any reputational damage and breakdown in employee relations. Staff may become dissatisfied and upset from being historically underpaid while on holiday, leading them to feel short-changed for the work they’ve contributed to the company.

Steps to take now

The decision from the Supreme Court is not due until later in 2023, which makes it all the more important that employers act now ahead of any ruling. It would be prudent to start checking if there are any claims for underpayment of holiday by staff members, and whether this needs to be communicated across the company.  Calculating potential back pay now will also place your business in a better financial position as you will be prepared for any financial impact. By taking action now, you will reassure employees that you care about the outcome of the case and are taking steps to address any previous discrepancies and future questions about holiday pay calculations.

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