Monthly Highlights – UK Employment Law – October 2023

In this month’s update, our team discuss a significant recent ruling by the Supreme Court relating to historic holiday pay claims. We also explore a recent High Court case relating to bonus clawback provisions and a recent Employment Tribunal case which held that the failure of an employer to make reasonable adjustments for a menopausal employee was disability discrimination.

1. Historic Holiday Pay Claims

In the case of Chief Constable of the Police Service of Northern Ireland v Agnew, the Supreme Court held that a gap of three months between underpayments of holiday pay does not break the chain of a series of unlawful deductions nor will an instance of a correct payment automatically break a chain.

The Facts

• Employees of the Police Service of Northern Ireland had been paid their basic pay while on annual leave without regard to overtime and other allowances since the introduction of the Working Time Regulations 1998. Case law has established that holiday pay must be “normal” wages. Therefore, if an employee regularly works overtime or receives allowances, this should be factored into their holiday pay calculation.
• The claimants brought claims for underpayment of holiday pay. The main question for the tribunal to consider was how many years back the claims could go and whether the underpayments were broken by a three-month gap in a series of deductions. The relevant Northern Irish legislation (which mirrors the Employment Rights Act 1996) provided that a claim could only be made in respect of a payment made in the three months before the claim was brought. However, if the deduction was part of a series, the deductions could be linked together provided that the claim was brought within three months of the last of the series of deductions.
• Previously, in the case of Bear Scotland v Fulton, the Employment Appeal Tribunal (EAT) held that deductions could be linked in a series only if a gap of three months or less existed between each deduction.

Findings

• The Supreme Court ruled that a gap of three or more months between deductions will not automatically break a series of deductions or bring that series to an end. As such, it overturned the “three-month break rule” established in Bear Scotland v Fulton. This means that even where there has been more than a three-month gap between underpayments, a claimant may be able to claim for those “pre-gap” underpayments if they form part of a series of deductions.
• The Supreme Court held that one lawful payment will not necessarily break a series of deductions. Whether a lawful payment interrupts the series will depend on the circumstances in each case, including the reason for the deductions and how that reason links with any lawful payment that has been made.However, if holiday pay is calculated correctly for all future payments, then the employee will only have three months to bring their claim in respect of the whole series of deductions.
• When determining whether a deduction forms part of a series, a tribunal will consider all circumstances including the size, frequency and impact of the deductions. The tribunal will determine what common “fault” underpins those deductions. In this case, the Supreme Court found that the common fault that linked the underpayments was the calculation of holiday pay at the rate of basic pay, rather than normal pay.
• The Supreme Court further held that there is no requirement for different types of annual leave to be taken in a particular order. Indeed, the different “pots” of annual leave that UK employees are entitled to are four weeks’ leave derived from the Working Time Directive, an additional 1.6 weeks’ leave provided for under UK law and any contractual leave. In the case of Bear Scotland v Fulton, the court held that, unless the employer directed otherwise, Working Time Directive leave would be treated as being used up first, followed by UK statutory leave, then any contractual leave. However, the Supreme Court determined that workers are likely to look at their annual leave entitlement as a single composite pot. This approach aligns with the UK Government’s plans to merge annual leave entitlements into one type of statutory annual leave which our team previously discussed here.

Employer Liability for Backdated Holiday Pay

• For employers that have been underpaying holiday pay (for example, calculating this as basic pay, rather than including overtime or commission), this decision could expose them to liability for backdated holiday pay. However, it is important to note that the extent of liability will depend on where in the UK the employer or employees are based. Indeed, the implications are unlikely to be significant for employers based in Great Britain (i.e. England, Scotland & Wales) due to the “two-year backstop” introduced by the Deduction from Wages (Limitation) Regulations 2014.  This backstop applies to a range of unlawful deduction claims, including claims relating to holiday pay, meaning that those claims are limited to two years’ worth of losses dating back from the date on which the claimant presents a claim. However, Northern Ireland does not have an equivalent to the two-year backstop and therefore, liability could potentially extend to many years’ worth of losses. 

Next Step for Employers

• If employers do calculate holiday pay on the basis of basic pay only, they should consider carrying out an audit on holiday pay calculations to determine whether any worker regularly receives overtime or allowances which out to be included in holiday pay.
• An employer that has been incorrectly calculating holiday pay should ensure it is calculated correctly. Indeed, the limitation period for a claim for unlawful deduction from wages is three months from the date of the last unlawful deduction. As such, whilst a single lawful payment will not automatically break a series of deductions, it will start the clock on the limitation period and may increase the chances of the limitation period passing without a worker bringing a claim. This will be particularly crucial for employers with workers based in Northern Ireland given the lack of a two-year backstop.

2. Bonus Clawback Provision Did Not Constitute a Restraint of Trade 

In the case of Steel v Spencer Road LLP, an employee who gave notice one month after his discretionary bonus was paid lost his appeal to retain the bonus in light of the Judge’s findings that the clawback provision was not a restraint of trade or a penalty clause.

The Facts

• The claimant’s employment contract expressly provided that, to keep his bonus, he must remain in employment with the company for three months after the bonus payment date and must not have given or received notice to terminate his employment during that period.
• In January 2022, the claimant received a bonus of £187,500. He subsequently gave notice within three months. The employer issued a statutory demand for the return of the bonus, plus legal fees.
• The claimant applied to the Insolvency and Companies Court to set aside the statutory demand. He argued that the clawback provision was an unreasonable restraint of trade or a penalty clause and was therefore unenforceable.
• The claimant’s application was dismissed on the basis that the Judge found that the bonus clawback provision was not a restraint of trade as it did not restrict the employee’s ability to work elsewhere. The Judge also considered that the claimant’s argument that the provisions operated as a penalty clause had no real prospect of success.
• The claimant appealed to the High Court.

Findings

• The High Court dismissed the appeal. The High Court ruled that although a clawback provision is meant to discourage employees from resigning, this does not amount to a restraint of trade or prohibit the employee working elsewhere and had no bearing on allowing the clawback.

Key Takeaways

• This case serves as a helpful reminder that a clawback provision of bonus payments which are conditional on the employee remaining employer for a specified period is not necessarily a restraint of trade. However, employers who wish to include bonus clawback provisions should ensure the provisions are clear and reasonable and that employees fully understand the terms and effect of the provisions.

3. Menopause Symptoms May Amount to a Disability

In the case of Lynskey v Direct Line, the Employment Tribunal held that an employer was liable for disability discrimination and a failure to make reasonable adjustments after giving a menopausal employee a low appraisal and written warning about her performance.

The Facts

• The claimant worked for her employer from 2016 until 2022, when she resigned.
• During the first four years of her employment, the claimant consistently received high ratings in her annual performance reviews. However, in 2019 she started to experience menopausal symptoms and found it difficult to concentrate. The claimant was subsequently diagnosed by her GP with a hormonal imbalance, depression and low mood swings and was prescribed anti-depressants. The claimant informed her manager.
• The claimant’s employer offered her a different role in the company to help alleviate her stress. The claimant accepted the new role, but her manager soon developed concerns about her conduct and marked her performance as “requiring improvement”, without considering that her menopausal symptoms could be an underlying factor in her performance Her employer commenced a formal performance improvement plan and gave her a written warning without taking into account her menopausal symptoms.  The claimant was subsequently signed off work due to stress and was put on the employer’s sick pay.
• After two months of receiving sick pay, the claimant’s employer informed her that she would no longer continue to receive company sick pay. This caused the claimant further stress and anxiety. The claimant subsequently brought a grievance and later resigned, referring to the treatment she had received from her employer and brought a claim in the Employment Tribunal for disability discrimination.

Findings

• The Employment Tribunal held that the claimant’s low performance rating, receipt of a written warning and cessation of company sick pay constituted less favourable treatment as the symptoms she had experienced amounted to a disability. The Employment Tribunal also found that the employer had failed to make reasonable adjustments. Indeed, the Employment Tribunal held that the employer ought to reasonably have known of the claimant’s disability when she advised her manager of this.

Key Takeaways

• Whilst menopause itself is not a protected characteristic under the Equality Act 2010, the symptoms the claimant experienced had a substantial impact on her day-to-day activities and therefore, the Employment Tribunal held that this amounted to a disability.
• Although the decision is not yet binding and may be appealed, it highlights the problems with managing disabled employees who are not meeting required performance standards. This is particularly relevant in the context of menopause, where managers may lack awareness and understanding about how symptoms can impact work and the day-to-day. Employers should consider training HR and managers to raise awareness of menopausal symptoms and how to manage this in the workplace.