Critical: Holiday pay case update – what SMEs need to know

13 min read  |   14 November, 2023   By Chloe Pereira - Employment law Partner & Legal Director, Outset

Piles of copper coins are shown stacked up against a cocktail umbrella masquerading as a parasol, against a blue background

If you only read about one case in 2023, make it this one. In this blog, we navigate the maze of holiday pay, as we take a deep dive into the landmark ruling in the case of Chief Constable of the Police Service of Northern Ireland v Agnew – along with the implications for SMEs. 


In the dynamic tapestry of employment law, pivotal moments often redefine the landscape for both employees and employers. Such a moment occurred in October 2023 when the Supreme Court, in the case of Chief Constable of the Police Service of Northern Ireland v Agnew, delivered a verdict that echoed across the UK, leaving a lasting impact on the realm of holiday pay.  


This landmark ruling, with its nuanced complexities, signifies a significant departure from conventional interpretations, opening the floodgates to historical claims and demanding an evaluation of how businesses approach holiday pay calculations. 


In this blog, we’ll explain what SMEs need to know and provide some actionable next steps to make sure you’re covered in terms of the legal change.   


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Case background

A paradigm shift in holiday pay claims

The principle of equivalence: empowering workers

A unified approach to calculating holiday pay

7 practical solutions for SMEs to navigate the ruling

Navigating the future of holiday pay



Case background 


Over the years there have been many employment law cases relating to holiday pay, covering key issues like how entitlement is calculated, what happens to holiday during sick leave and what holiday pay should be based on. 


It was established almost 10 years ago that when calculating holiday pay, employers must base it on normal, not basic, pay. This meant including commission payments in the calculation (Lock v British Gas Trading Ltd). Later cases determined that overtime and other allowances also have to be included in that sum. 


These decisions led to a flood of claims for historical underpayment of holiday pay, as employees sought to recover extra sums. Despite the well-publicised decisions, many employers remained unaware of their obligations, or simply unwilling (or unable) to change their method of calculation due to the substantial financial impact it would have. This has led to a steady flow of holiday pay related claims over the years, resulting in the courts examining more and more points around holiday pay and entitlement. 


On the whole, the legal developments haven’t been favourable for employers. 



A paradigm shift in holiday pay claims 


Previously, employees bringing holiday pay claims could look back over time to recover underpaid sums over a long period, known as a ‘series of deductions’ – however, their ability to do this was limited.  


If an employer had paid a correct amount of pay, or an individual just hadn’t taken any holiday for a period exceeding 3 months, this would ‘break the chain’ in the series of deductions. This meant that liability for employers for historical underpayments of holiday pay was limited. 


However, the Agnew ruling has dismantled these barriers, adopting a broader perspective rooted in the ordinary English meaning of the word ‘series’... let's dive in.


The Supreme Court ruled that the word ‘series’ means ‘a number of things of a kind which follow each other in time’. Things in a series don’t necessarily need to be next to each other in sequence. Another key factor for the Supreme Court was that the same offence linked the underpayments (for example, basing holiday pay on basic pay). 


This expanded view allows holiday pay claims that are interconnected to be considered part of a series, irrespective of minor gaps. This significant departure from the previous position, and the nuances that go with it, create an intricate legal landscape. This demands a careful approach by employers to ensure compliance and minimise the risk facing substantial claims. 



The principle of equivalence: empowering workers 


At the heart of the Agnew ruling lies the ‘principle of equivalence’, a foundational concept ensuring that national remedies concerning EU rights must be no less favourable than those governing domestic actions. In other words – the UK can’t be any less generous than the EU when it comes to rights (which include holiday pay) originating in EU law. 


This principle serves as a powerful tool for workers, empowering them to assert their rights even when the acts in question occurred outside the conventional three-month timeframe.  


Employers in England and Wales have additional protection from a specific change to the law in 2014 which placed a 2 year backstop on holiday pay claims. Therefore, employees can only look back a maximum of 2 years in relation to any claim that their holiday pay was calculated incorrectly.  


The implications of Agnew are particularly profound in regions like Northern Ireland, where the absence of the 2-year backstop opens the door to historical claims dating back several years. 

Coins in a glass jar labelled 'holiday'


A unified approach to calculating holiday pay


Another critical aspect of the Agnew ruling is the holistic view of holiday pay. Previously, different types of leave like statutory entitlement compared to enhanced contractual holiday, were treated as separate entities. For example, employers may be familiar with the concept that an enhanced holiday pay calculation only needs to apply to the first 4 weeks of leave. 
However, Agnew changes this position, and now all forms of leave must be treated as a composite whole.  
This shift could result in significant additional costs to employers, particularly if you’re one who has been able to save costs up to now by calculating different types of holiday based on different amounts. 


7 practical solutions for SMEs to navigate the ruling 


In the wake of the Agnew ruling, SMEs face a daunting challenge. Navigating this intricate legal change requires proactive measures and a deep understanding of the nuances involved.  
Here are some practical solutions tailored to the specific needs of SMEs: 
1.    In-depth audit of holiday pay calculations 
SMEs should initiate a comprehensive audit of their holiday pay calculations. This audit should delve into the specifics of overtime, allowances, and other components. The goal is to identify and rectify potential discrepancies before they escalate into legal challenges. 
2.    Transparent record-keeping & documentation 
Accurate and transparent record-keeping is the bedrock of legal compliance. SMEs should implement robust systems that document how holiday pay is calculated. These records serve as invaluable evidence in case of legal scrutiny, demonstrating adherence to fair practices. 
3.    Proactive legal advice 
Employment laws are intricate, subject to change, and rife with nuances. SMEs should proactively seek legal counsel from experts well-versed in employment law. Establishing a relationship with legal professionals ensures swift adaptation to evolving legal landscapes, reducing the risk of legal disputes. 
4.    Employee training and communication 
Transparent communication is key to navigating legal complexities. SMEs should invest in employee training programmes that educate relevant staff about changes in holiday pay calculations. You may also wish to consider whether to communicate with your wider workforce. Clear communication fosters trust, ensuring that employees are aware of their rights and responsibilities. 
5.    Explore insurance options 
Given the potential financial impact of historical claims, SMEs might consider exploring insurance options tailored to employment disputes. Employment dispute insurance can provide financial coverage for legal costs, acting as a safety net against unforeseen legal expenses. 
6.    Regular policy reviews & updates 
Employment policies should be living documents, evolving in tandem with legal changes. SMEs should conduct regular policy reviews, ensuring that internal policies align seamlessly with the latest legal developments. Regular updates safeguard SMEs against inadvertent policy violations. 
7.    Collaborative industry engagement 
SMEs can benefit from industry-specific forums and associations. Engaging with peers allows businesses to share insights, learn from each other's experiences, and stay informed about best practices. Collaborative engagement fosters a supportive ecosystem, enabling SMEs to navigate legal challenges collectively. 



Navigating the future of holiday pay 


The Agnew ruling ushers in a new era in holiday pay claims. For SMEs, this demands a proactive, meticulous approach, grounded in accurate calculations, transparent communication & seeking proactive legal advice.  


By embracing these practical solutions, SMEs can both navigate the complexities of the legal maze and also foster a workplace environment rooted in trust, compliance, and employee wellbeing.  


As the legal landscape continues to evolve, SMEs equipped with comprehensive strategies are poised to navigate the future of holiday pay with confidence and resilience. 


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Author: Chloe Pereira - Employment law Partner & Legal Director, Outset

Chloe Pereira is Breathe's new legal expert & employment law Partner. Chloe is a seasoned employment law expert with 15 years of experience, joined Outset Group in 2016. Leading the Mid-Sector People Services team, she specialises in advising clients with 100-1,000 employees. Chloe is known for her strategic and commercial legal advice, particularly on complex employment issues like senior executive exits, TUPE matters and collective consultation.

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