Unlawful deductions from wages claims and the 3-month rule

In 2014, the Employment Appeal Tribunal ruled that workers and employees could only bring claims for unlawful deductions from wages in respect of a "series" of underpayments where the gap between the deductions was 3 months or less (the 3-month rule). 

The 3-month rule severely limited the ability to bring claims for historical underpayments of holiday pay.  This is because caselaw had established that only 4 weeks of holiday (EU holiday derived from the Working Time Directive) had to be paid as 'normal' pay, including payments such as overtime and commission. The remaining 1.6 weeks of holiday pay (UK holiday under the Working Time Regulations 1998 (WTR)) could be paid as basic pay. The EAT held that EU holiday would be deemed to be taken before UK holiday, which meant that historical liabilities would often fall away towards the end of the holiday year. The Deduction from Wages (Limitation) Regulations 2014 also introduced a 2-year backstop period for most unlawful deductions from wages claims brought on or after 1 July 2015.

Facts

Between 2015 and 2016, claims were issued on behalf of 3,380 police officers and 264 civilian employees employed by the Police Service of Northern Ireland (PSNI) who had only received basic pay during their holidays. The claims amounted to an estimated underpayment of approximately £30 million, but the PSNI relied on the 3-month rule to argue that the underpayments amounted to only approximately £300,000.  The claims were upheld at first instance but PSNI appealed to the Court of Appeal in Northern Ireland.

In 2019, the Court of Appeal in Northern Ireland ruled that a "series of deductions" in an unlawful deductions from wages claim will not necessarily be broken by gaps of more than 3 months between underpayments.  It also found that a worker has an entitlement to all holiday from whatever source and there is no requirement that holiday from different sources is taken in a particular order. The case was referred to the UK Supreme Court and heard in December 2022, with judgment reserved.

On 4 October 2023, the UK Supreme Court confirmed that a series of unlawful deductions is not necessarily broken by gap of 3 months or more if there is a common fault (or 'unifying vice') that factually links each underpayment.  

Whether there is a “series” of deductions is essentially a question of fact, taking all relevant circumstances into account.  This includes the similarities and differences between the deductions, their frequency, size and impact, how they came to be made and applied and what links them together.  Here, each unlawful deduction was linked by the common fault that holiday pay had been calculated by reference to basic pay only.

The Court also held that there is no assumption on the order in which different types of holiday entitlement are taken within the holiday year and that, “if and insofar as it is not practicable to distinguish between different types of leave” then all the holiday to which a worker is entitled forms part of a single composite pot.  This means that each day of holiday would include a proportion of each type of holiday entitlement (some EU holiday, some UK holiday and, if relevant, some contractual holiday).

The Court held that reference periods when calculating holiday pay are a question of fact and that it is not appropriate to use the number of calendar days in the reference period when calculating normal pay.