UK manufacturers could be hit hard by latest holiday pay ruling

A recent ruling in the Northern Ireland Courts could have a significant impact on UK manufacturing businesses that still aren't including overtime payments, allowances or some commission payments in holiday pay.

The latest development on the issue of how holiday pay should be calculated is expected to have a big impact on manufacturers due the high levels of overtime paid to staff working in the sector.

The issue of whether businesses are underpaying workers for their holiday was sparked by a series of high profile rulings which stated that employers should pay staff non-guaranteed and voluntary overtime, some allowances and performance related commission payments when calculating holiday pay.

This led to fears amongst many businesses that this would lead to huge backdated claims from employees who had been underpaid for years. A controversial ruling in 2014 by the Employment Appeals Tribunal in the case involving infrastructure and maintenance company, Bear Scotland Limited, allowed many organisations to use technical arguments to successfully limit their liability in this area. 

However, a recent decision in the NI Court of Appeal in Chief Constable of the Police Service of NI and others v Agnew has overruled those technical arguments and made it much more likely that UK courts will - at some point in the near future - follow suit.

The case in Ireland was brought on behalf of 3,380 police officers and 264 civilian employees who had only received basic pay during their holidays. At the time the claims were issued (2015/16) the underpayments were estimated to amount to around £30 million. 

The Police argued they were entitled to apply the EAT's reasoning in Bear Scotland and exclude those payments it could lawfully make at basic pay. Applying this method resulted in underpayments of around £300,000. 

The issue eventually wound up before the NI Court of Appeal which made some very important findings which included that the EAT's analysis in Bear Scotland was incorrect and had resulted in 'arbitrary and unfair' results.  

As a result, the workers in this case can recover underpayments going back to the start of their employment (or 1998 if earlier). It's been estimated that their claims are now valued at £40 million.

Glenn Hayes, an employment partner at Irwin Mitchell and specialist in the manufacturing sector, said: 

“Decisions in Northern Ireland are not binding in England & Wales, but we expect this decision to be persuasive and to affect the outcome of future cases in England, Wales and Scotland. 

“We also believe that The Deduction from Wages (Limitation) Regulations 2014 which the government introduced to limit how far back individuals can bring unlawful deduction claims to two years in England, Wales and Scotland may also be challenged as being unlawful. The argument is that these Regulations breach the EU principles of equivalence and effectiveness and if they fall, the avalanche of claims that many speculated about five years ago may become a reality.

“To avoid this, employers must make sure that staff receive normal pay when they go on holiday, for at least 20 days of their leave. Claims still have to be brought within three months from the date of the last underpayment, therefore the sooner organisations pay the right amount, the better.”

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