Holiday pay: The PSNI case that could cost the employer £40m
By Justine Riccomini, Head of Tax (Employment and Devolved Taxes)
2 November 2023
We explain the decision in the recent Police Service of Northern Ireland case and set out why it is vital that our members speak to their clients about it.
A decision handed down by the Supreme Court on 4 October 2023 in the case of Chief Constable of the Police Service of Northern Ireland and another (Appellants/Cross-Respondents) v Agnew and others (Respondents/Cross-Appellants) (Northern Ireland) [2023] UKSC 33 could have far-reaching implications for many workers and employers in terms of holiday pay arrears
Background
The case was brought by Unison on behalf of Alexander Agnew and 3,700 of his Police Service of Northern Ireland (PSNI) police and civilian staff colleagues. As a result of the decision, the workers would become entitled to claim arrears of holiday pay based on a calculation of so-called “normal pay”, as opposed to the method upon which it had been paid – that of so-called “basic pay”.
Normal pay vs basic pay
The calculation for normal pay includes overtime, but an assumption had been made in this case that it was sufficient to remunerate the officers and civilians using only their basic pay rate whilst on holiday, as they were not actually working and therefore couldn’t be accruing overtime payments. European case law deems that the employees were entitled to normal pay during periods of annual leave, which includes an element of overtime based on previous weeks’ averaging. This concept came to light in the 2014 Bear Scotland v Fulton Employment Appeal Tribunal (EAT) case, where it was decided that employees who regularly work overtime should receive additional holiday pay because an expectation of their “normal pay” had been created by the acts of being asked to work, and agreeing to work, overtime.
Time-barred?
One of the outcomes of the Bear Scotland case was that a protection against pay claims extending back to 1998, when the Working Time Regulations were introduced, was set out. The decision stated that if a gap of three months or more between holiday underpayments existed, future claims would not succeed.
Furthermore, the Deduction from Wages (Limitation) Regulations 2014 came into effect in 2015, which amended the Employment Rights Act 1996 and introduced a so-called “backstop”. This had the effect of time-barring claims which related to unlawful deductions from wages (including holiday pay) made more than 24 months prior to the date of the claim.
Key to the PSNI case however was the fact that this backstop rule was not enacted in the Northern Irish jurisdiction. If it had been, the arrears would have amounted to around £300,000.
The decision
Significantly, the Supreme Court disagreed with a significant aspect of the decision of the EAT in Bear Scotland, concluding that for the purposes of a claim for unlawful deductions the three-month gap between holiday pay underpayments was not enough to break the entitlement to previous underpayments.
The Supreme Court went on to determine that PSNI had made a series of unlawful deductions, each being linked to its predecessor by a common error - holiday pay had been calculated by reference to “basic pay” rather than “normal pay”.
The Supreme Court also determined that due to the absence of a “backstop” in Northern Ireland, the claimants would be eligible to reclaim up to 25 years’ worth of miscalculated holiday pay (back to November 1998), amounting to a bill of more than £40m.
Making a claim: NI v rest of UK
Whilst there is now a 25-year claims limit in Northern Ireland, a liability limitation of two years currently continues to exist in England, Scotland and Wales. Historical holiday pay claims can be brought across the UK where there are gaps of three months or more between periods of underpayment.
Employment tax implications for clients and agents to discuss
It is without doubt that many cases will come before the tribunals in future and indeed, many have been waiting in the wings for the PSNI decision to be released. If ICAS members consider that their client may be at risk of having made underpayments of holiday pay, first and foremost, the client should seek employment law advice from a suitably qualified practitioner.
The next step should be to consider the knock-on effect of potential employment tax implications which may accompany that underpayment and must be unpicked – such as an employer compliance review, payroll returns through Real Time Information, PAYE and NICs underpayments, pensions adjustments where the pay is pensionable, employee HR self-service portals, and pensions and rewards platforms.
Consider also unionised businesses and TUPE transfers where mergers have taken place, especially involving NI businesses, to ensure the due diligence takes not only this case decision into account as well as the 2022 Harpur v Brazel holiday pay case. An article about this case was featured in the 6 September 2022 Taxation Magazine, issue 4855. Employees in receipt of an arrears award who are on tax credits may need to discuss this matter with HMRC.
Other considerations
Readers of the ICAS Technical Bulletin will be pleased to note that our Tax, Public Policy and Practice Support teams will be producing a collaborative piece on the various other consequences and implications of this case, such as corporation tax, accounting treatment and pensions.
It may be necessary for agents who run payroll bureau to review letters of engagement on the basis of this case. Members should speak to their clients about issues affecting them as early as possible.
What the DBT has to say about it
The Department for Business and Trade (DBT) has advised that it intends to keep consulting on holiday pay over the coming years as part of a promise to reduce the admin burden of administering holiday pay on employers. However, it could also be said that, had the legislation been drafted properly in the first instance, with clear definitions and unequivocal guidance, employers would not be facing the potential problems they now face as a result of this case decision. The support employers require is simply not to find themselves in this situation in the first place.
If you wish to contribute to the debate…why not join an ICAS tax committee and bring your expertise straight to the Tax Team?
