In the case of Chief Constable of The Police Service of Northern Ireland and another v Agnew and others, the court found the unlawful payment of Agnew and others was linked by the same error: the claimants’ holiday pay had been calculated based on basic pay only, without considering their 'normal' remuneration, which included overtime.
Paul Mander, head of employment at Penningtons Manches Cooper, said the decision will have the most impact on employers that rely heavily on overtime, like the NHS, and commission payments, for example in recruitment.
Speaking to HR magazine, Mander said: “Where overtime and commission have not correctly been included in the calculation of holiday pay, employers will no longer be able to ‘break’ the chain of underpayments by making a correctly calculated payment.
“Nor will employees be penalised if they have a gap of more than three months between periods of annual leave.”
Prior to yesterday's ruling, a 'series' of unlawful deductions made from an employee’s holiday pay was broken by a period of three months or more.
Employment law still limits the amount of time for employees to make a claim however.
Any unlawful deduction claims for holiday pay need to be made within three months of the last time a pay deduction was made and, Mander added: “It is important to note that claims for unlawful deduction of wages can only go back two years, regardless of the length of the series of deductions.”
Simon Jones, director of Ariadne Associates, said the decision is unlikely to affect most employers and could change as the government rewrites EU-based law.
Speaking to HR magazine, he said: “The rules on how to calculate normal pay have been clear for a few years now, and in any case are subject to regulations that limit claims to a maximum of two years historic underpayment.
“In addition, one of the few areas where the government has said it intends to deviate from EU law is around holiday pay, so this specific area may disappear in the future.”
The Supreme Court’s decision follows as series of employment tribunal and appeal rulings.
In 2014, the case of Bear Scotland v Fulton decided that voluntary overtime and some other allowances should be included in holiday pay.
However, the employment appeal tribunal made it near impossible therefore for workers to recover losses for underpayments occurring in prior years.
The Court of Appeal in Northern Ireland found that the restrictions were arbitrary and unfair, but its decision was not binding in UK courts and tribunals.
Going forward, Mander added: "HR professionals should make sure that their holiday pay arrangements are legally compliant and reflect an employee’s true remuneration package, so staff do not lose out financially when exercising their right to take annual leave.
"If there is a previous history of non-compliance, HR professionals should assess their potential exposure and make any necessary accruals."