How far back can a “series of deductions” go in respect to unlawfully deducted holiday pay?

The law surrounding holiday leave and entitlement is notoriously complex. As covered in our last website post, The Court of Appeal has recently clarified how much holiday pay a worker (in this case misclassified as self-employed by their employer) can expect on termination. However, the Court also added comments which have the potential to extend how far “a series of deductions” can stretch back in respect of claims of underpaid holiday pay.

The Law

Where a Claimant believes they have not been paid the correct holiday pay, they conventionally have two options in respect of claims they can bring in the Tribunal: a claim under Regulation 30(1)(b) of the Working Time Regulations 1998 (“the WTR Regulations”) or a claim under section 23(2) of the Employment Rights Act 1996 (“ERA”). Both causes of action have a 3-month limitation period. Claims for historical underpaid or unpaid holiday are often brought as unlawful deductions claims because the time limit can run from the last in a series of deductions.

However, the effectiveness of using a series of deductions to bring historical claims was limited by the case of Bear Scotland Ltd and others v Fulton and others (“Bear Scotland”) which held that a gap of three months or more between deductions breaks the series meaning that anything before the three-month gap cannot be claimed. The case of Chief Constable of the Police Service of Northern Ireland and another v Agnew and another (“Agnew”) did not follow Bear Scotland in holding that such a gap did not break the chain of the deductions and that deductions more than 3 months apart could be linked in a series. However, this decision was limited to Northern Ireland.

The Deduction from Wages (Limitation) Regulations 2014 (“the 2014 Regulations”) imposed a two-year cap on retrospective unlawful deductions claims. This was partly in response to the Bear Scotland decision which, alongside the three-month gap finding, found that holiday pay for leave taken under the Working Time Directive should be calculated on the basis of “normal remuneration”. This, in some instances, expanded the amount that workers can expect to receive in holiday pay. The 2014 Regulations were to an extent an attempt to mitigate the potential cost of this by limiting the reach of any series of historical deductions.

Decision

The Court found that Smith had been denied his holiday entitlement and was due the full sum of holiday pay throughout the duration of his contract. As it found that his right crystalised on termination, the 2014 Regulations did not apply and there was no need make a finding on the law surrounding whether a “series of deductions” was broken by a three-month gap between under-payments.

However, the Court still decided to comment on this question regardless. The Court’s “strong provisional view” was that the decision in Bear Scotland was wrong. There was nothing in the wording of section 23(3) ERA 1996 which suggested that a “series of deductions” was linked to a 3-month limit to bring a claim. Rather, whether a “series of deductions” exists was a question of fact and degree.

Comment

While Bear Scotland remains good law for the moment, the non-binding comments on a series of deductions from the Court of Appeal potentially expands the scope of future holiday pay claims. As mentioned, the 2014 Regulations limit a claim for unlawful deduction to only 2 years’ worth of deductions, but this opinion increases the likelihood that a future claim in respect of deductions could extend up to the statutory limit. This in turn increases the potential cost of such a claim. By affirming Agnew’s reasoning, it also raises the prospects of affirming that decision in other respects, for example, that one correct payment would not break a series of otherwise unlawful deductions.

It was hoped that some clarity would be provided regarding this issue as the decision in Agnew was subject to an appeal to the Supreme Court which was due to be heard in 2021. Any resulting decision would have resulted in a binding judgment on this issue. However, the case was removed from the Court listing due to settlement discussions last year. Therefore, until this point is tested again in litigation, this area of law remains uncertain.

Case reference: Smith v Pimlico Plumbers Limited [2022] EWCA Civ 70

*This article is for information purposes only. You should seek specific legal advice on any legal issues.*