Supreme Court Ruling on Holiday Pay

The interpretation of what constitutes normal pay has been evolving since 2014/15. On 4 October, the Supreme Court issued a landmark decision making it simpler for employees to reclaim unlawful deductions from their holiday pay.

Background: “Normal Pay” vs. Contracted Hours

In Chief Constable of The Police Service of Northern Ireland and another v Agnew and others, the Supreme Court confirmed that holiday pay must reflect an employee’s actual hours worked—including overtime—rather than just contracted hours. This reverses the previous PSNI approach and could lead to a backdated bill of around £40 million.

Nationwide Impact on Public Sector Workers

As a supreme ruling, it applies UK-wide. Public sector staff who rely heavily on overtime or commission—such as the NHS—may find they have been underpaid for years. If, for example, an employee contracted for 30 hours regularly works 40 with overtime, holiday pay must now be based on the full 40 hours.

Legal Clarifications and Claim Deadlines

Although the ruling removes the “break” in a series of deductions after three months, employment law still limits claim periods:

• Any unlawful deduction claim must be made within three months of the last deduction.
• Claims can only go back two years, regardless of how long the underpayment series lasted.

Expert Commentary

Paul Mander, Head of Employment at Penningtons Manches Cooper, told HR Magazine that employers relying on overtime and commission payments will be most affected. Employers can no longer “break the chain” by making a correct payment after under-calculating holiday pay. Furthermore, employees will not be penalised for gaps of over three months between annual leave periods.

Simon Jones, Director of Ariadne Associates, noted that while most employers calculate holiday pay correctly, the government may revise EU-based holiday pay regulations in future.

Precedents & Historical Rulings

Key past cases include:

• Bear Scotland v Fulton (2014) – Established that voluntary overtime and certain allowances must be included in holiday pay.
• Employment Appeal Tribunal – Previously limited recoverable underpayments from prior years, a restriction later deemed arbitrary by Northern Ireland’s Court of Appeal.

Recommendations for HR Professionals

HR teams should:

• Review and update holiday pay arrangements to ensure they reflect an employee’s full remuneration package.
• Assess any historical non-compliance and book necessary accruals for potential claims.
• Communicate changes clearly to staff to prevent future disputes.

By taking these steps, organisations can minimise exposure and support employees in exercising their right to fair annual leave pay.