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How do you calculate holiday pay?

How should you factor in overtime in the context of the Working Time Regulations 1998? 

This was a question that was answered this morning (4th October 2023) by the Supreme Court (UKSC) in London. 

Background

In a 2019 case brought by Unison on behalf of 3,700 members against the Chief Constable of the Police Service of Northern Ireland (PSNI), the Northern Ireland Court of Appeal (NICA) held that staff had not received the holiday pay to which they were entitled. Some claims dated back to the introduction of the Working Time Regulations in 1998. The sum involved could be up to £30m in back pay.

The case followed the 2016 decision in Bear Scotlandwhere the Employment Appeal Tribunal (EAT) found that regular overtime, which employees were obliged to perform if requested by the employer, should be included in holiday pay calculations. 

As a protection for employers, the EAT said that such claims would not succeed where there had been a cap of three months or more between holiday underpayments. 

The NICA held, however, that if the underpayments could be linked, they could form a series, even if they were more than three months apart. 

It is important to note that the NICA judgement was not binding on courts and tribunals in England & Wales, and further that in England and Wales the law was changed to limit unlawful deduction of wages claims to two years back pay which gives increased protection to employers in this jurisdiction compared to Northern Ireland.  

The PSNI appealed to the UKSC.

Judgment

Lady Rose delivered the unanimous judgment of the Supreme Court.

“[W]e are… satisfied that the Court of Appeal made no error in finding:

  • that each unlawful deduction in relation to holiday pay 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;
  • this method of calculation linked all payments of holiday pay, and it did so consistently from 23 November 1998;
  • it mattered not that the interval between these payments was from time to time in excess of three months; and these intervals of more than three months did not, in and of themselves and as a matter of law, break the series or bring it to an end; and further,
  • the series was not broken or brought to an end by any correct and lawful payment of holiday pay in so far as that payment came about (in common with the other payments in the series) by virtue of the application of the common fault or vice that holiday pay was calculated by reference to basic pay rather than normal pay. In these cases, each payment was still linked to its predecessor by the common fault or vice that holiday pay was calculated by reference to basic pay rather than normal pay.”

Appeal dismissed.

Comment

The repercussions for employers in Northern Ireland are significant. Holiday pay claims can go back to the introduction of the Working Time Regulations in 1998. 

In England & Wales, as in Scotland, the regulations have, however, been varied to limit claims to two years’ worth of under-payments.

We have noticed an increase in union-backed claims following the 2022 UKSC ruling in Harpur Trust v Brazel, which primarily affected term-time, casual, and seasonal workers with the traditional method of calculating holiday pay for irregular hours at 12.7% for every hour worked was incompatible with the Working Time Regulations 1998.

It is anticipated that the quantum of these claims may increase with employers being unable to limit liability with the three-month gap defence.  

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