The Employment Rights Act 1996 (ERA), which is mirrored in Northern Ireland by the Employment Rights (Northern Ireland) Order 1996 (ERO), provides that claims for underpaid wages, including underpaid holiday pay, must be brought within 3 months of the underpayment or, if there has been a series of underpayments, then within 3 months of the last underpayment in the series.
The "3-month rule" was established by an Employment Appeal Tribunal (EAT) judgment in the case of Bear Scotland Ltd v Fulton (Bear Scotland) and provides that, where there is a gap of more than 3 months between any series of underpayments, it will break the series. For the purposes of a claim for underpaid holiday pay, this meant that a worker who had been paid the correct amount of holiday pay for a period of more than 3 months could not claim any further back than that period, which significantly limited the scope for back pay claims.
Following a series of cases in which the European Courts had ruled that holiday pay for the 4 weeks holiday entitlement afforded by the European Working Time Directive should reflect "normal" pay, over 3000 police officers brought claims in the Northern Ireland Industrial Tribunal (IT) for underpaid holiday pay. They claimed that the Police Service of Northern Ireland (PSNI) had calculated their holiday pay wrongly by reference to their basic salary only, rather than including overtime and various allowances. They argued that they were entitled to back pay dating back to 1998, when the relevant legislation was introduced.
The IT upheld their claims and, in reaching this conclusion, it considered the EAT's judgment in Bear Scotland. However, since EAT judgments are merely persuasive and not binding on Tribunals in Northern Ireland, the IT was not obliged to follow the EAT judgment and it declined to do so, holding that the EAT's conclusion that a 3-month break in any series of deductions broke the series was erroneous.
PSNI appealed to the NICA on a range of issues, including whether the 3-month rule was correct.
The NICA dismissed the appeal and, in relation to the 3 month rule, it noted "there is nothing in the ERO which expressly imposes a limit on the gaps between particular deductions making up a series". It accepted that, "holding that a 3-month gap breaks a series of deductions leads to arbitrary and unfair results," and concluded that, "as a matter of the proper construction of the ERO, we conclude that a series is not broken by a gap of three months or more".
The NICA also disagreed with the EAT's conclusion that, in any holiday year, the 4 weeks entitlement derived from the European Directive should be treated as taken first, followed by the additional 1.6 weeks provided by the Working Time Regulations, and then any additional contractual entitlement. In its view, annual leave formed part of a "composite whole" which could not be separated.
Since the NICA decided that a series of deductions would not be broken by the "3-month rule", the claimants were able to claim for arrears of holiday pay as far back as 20 years.
The NICA judgment not only has significant cost implications for Northern Ireland employers, as employees in Northern Ireland can now pursue claims for holiday pay going back to 1998, but it could also have implications on the rest of the UK.
Although the NICA judgment is not binding outside of Northern Ireland, if PSNI appeal the decision, (which, given the value of the claim, seems likely) the appeal will be heard by the Supreme Court and its decision would be binding across Great Britain and Northern Ireland.
In the meantime, it also increases the likelihood of appeals against any decisions of the Employment Tribunal (ET) which apply the 3-month rule. Although ET's are (for now at least) obliged to follow the EAT decision in Bear Scotland, the NICA decision is likely to provide persuasive authority for future challenges to the EAT and the Court of Appeal.
So for the time being, employers face a period of increased uncertainty. However, employers in England and Wales at least have the comfort of the backstop which was introduced following the European cases, and which limits claims for unpaid wages brought on or after 1 July 2015 to a maximum of two years back pay; Northern Ireland has no equivalent rule.