In the case of Patterson –v- Castlereagh Borough Council, the Northern Ireland Court of Appeal has held that there is no reason in principle why employers should not include voluntary overtime in the calculation of statutory holiday pay. The court went on to say that this will be a ‘question of fact’ for each tribunal to determine.
Although not binding on tribunals in England and Wales, this case arguably opens the door for workers to argue that voluntary overtime is part of their ‘normal remuneration’ and should be included in the calculation of statutory holiday pay. This adds further complication to an already uncertain area for employers.
Brief re-cap: Bear Scotland and beyond
The European Working Time Directive (WTD) dictates that all workers are entitled to four weeks' annual leave, but does not specify the rate at which this should be paid. The WTD is implemented in UK domestic law by the Working Time Regulations 1998 (WTR) which state that workers are entitled to 5.6 weeks’ annual leave (1.6 weeks more than required under the WTD) to be calculated at the rate of a week’s pay for a week's leave. The calculation for a week’s pay is governed by the Employment Rights Act 1996 (ERA) and excludes some elements of remuneration such as overtime and commission.
A number of cases before the Court of Justice of the European Union (CJEU) sought to challenge the calculation of holiday pay on the basis that reference to normal salary alone potentially placed some workers at a financial disadvantage during periods of annual leave. The CJEU’s response in these cases was that workers on annual leave should receive their normal remuneration and, further, that normal remuneration entitled a worker to any payment which is ’intrinsically linked’ to the performance of the tasks they are required to carry out under their contracts of employment. It was left to the domestic courts to determine what elements of remuneration would be deemed to be intrinsically linked to performance.
The conjoined appeals of Bear Scotland Ltd –v- Fulton and another, Hertel (UK) Ltd –v- Woods and others, and Amec Group Ltd –v- Law and others (hereafter referred to as the ‘Bear Scotland cases’) dealt specifically with whether other types of remuneration, most notably non-guaranteed overtime and some travel payments, should be considered normal remuneration and included in the calculation of holiday pay.
The key points arising from Bear Scotland cases were that:
- workers’ holiday pay should include a sum of money to reflect normal non-guaranteed overtime (i.e. where an employer is not contractually obliged to offer overtime but a worker is contractually obliged to perform it if requested). This only applies in respect of the basic four weeks’ leave granted under the WTD (i.e. the additional 1.6 weeks under the WTR can be calculated without reference to overtime).
- claims for arrears of holiday pay will be out of time if there has been a break of more than three months between successive underpayments (subject to the reasonable practicability test).
- travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration, should also be reflected when calculating holiday pay.
Patterson –v- Castlereagh Borough Council
At first instance the Industrial Tribunal in Northern Ireland held that truly voluntary overtime (i.e. that which the employer is not obliged to offer and the employee is not obliged to accept) should not be included in the calculation of holiday pay. This decision was in accordance with the Bear Scotland cases.
However, the Court of Appeal (there is no equivalent of the EAT in Northern Ireland) found that the tribunal had erred in finding that voluntary overtime could not, as a matter of principle, be included in the calculation of statutory holiday pay.
The facts of the case were such that there was no detailed analysis of the circumstances in which voluntary overtime may or should be included when calculating statutory holiday pay. In particular, the council agreed that the tribunal was wrong to find that, as a matter of principle, voluntary overtime should never be taken into account so there were no arguments made on either side. With reference to this, the court recommended that its findings be read with ‘a degree of caution attached to them’.
The issue of voluntary overtime was not afforded direct consideration in the Bear Scotland cases. However, many commentators expressed the view that it was only a matter of time before it came before a tribunal. In any event, it is often difficult to distinguish between types of overtime, particularly where custom and practice conflicts with the written contract of employment.
Decisions in the Northern Ireland Court of Appeal are not binding on tribunals in England and Wales, albeit they do have persuasive effect. Strictly, the current position in England and Wales remains unchanged for the time being, i.e. that truly voluntary overtime need not be taken into account when calculating holiday pay. However, the Patterson case provides a further indication that, if it is carried on with sufficient frequency to class as ‘normal’, voluntary overtime may well come to be included in the calculation of holiday pay in due course. We would encourage employers to take this into account both in terms of assessing liability and managing working patterns moving forward.
Practical steps in relation to holiday pay
Patterson additionally acts as a reminder that the wider issue of holiday pay is far from resolved as to how it applies in practical terms.
As with any unlawful deduction from wages claim, the only way to manage liability is to regularise the payments moving forward, thus breaking the chain of deductions. To achieve this in relation to holiday pay employers would have to pay a sum calculated with reference to any payment which is ‘intrinsically linked’ to the performance of the tasks that the worker is required to carry out under his/her contract of employment including, in particular, overtime and commission. As there are a number of unresolved issues in relation to holiday pay, there is currently no definitive formula which employers can apply to achieve this.
Notwithstanding this, we believe that there are practical steps that all employers can take at this stage to place their business in the strongest possible position.
- Determine current overtime arrangements: review current practices to determine whether your business will be affected by the changes. Key questions include do staff work overtime and, if so, how is this administered? Even if overtime is voluntary, you may wish to consider its inclusion in light of the above.
- Identify any other payments that should be taken into account: consider whether any other taxable allowances may need to be included in the calculation of holiday pay (e.g. travel allowances which exceed the expense incurred and, as such, constitute taxable remuneration).
- Identify how holiday pay is currently calculated: the implications of the Bear Scotland cases apply equally to all workers. However, by way of example, if you employ predominantly atypical workers with no normal working hours (such zero hours or casual workers) it is likely the judgment will have limited practical effect as their normal pay over a 12 week reference period should already be factored into the calculation of their holiday pay.
- If a decision is taken to adjust holiday pay, determine a suitable reference period:the EAT in the Bear Scotlandcases did not state what reference period should be applied when adding overtime/commission payments to holiday pay. It is anticipated that the tribunal will provide guidance on this issue in due course (although no date has yet been specified) and popular belief is that they will indicate either a 12 week or 12 month reference period. Until this time it is up to individual employers to determine what they consider to be a sensible reference period.
If the correct reference period is anticipated and applied at this stage, the chain of deductions will be broken and future liability for holiday pay will cease (the three month limitation period to bring a claim for previous deductions will also start to run). Conversely, if the tribunal determines a reference period which results in a higher calculation, it is arguable that the chain of deductions will not be broken.
Employers who choose to apply the reference period which results in the highest possible remuneration for its workers are unlikely to be caught out by this. However, there are pros and cons to this approach - employers are likely to be contractually bound by a reference period which gives a more positive outcome than the tribunal ultimately determines which could be costly in the long term.
On balance, it is our view that an employer that can demonstrate that it has given consideration to a sensible reference period is likely to receive some credit from a tribunal if it ultimately generates a shortfall. Unfortunately, this cannot be guaranteed. What can be guaranteed is that liability will continue to run for those employers who do not take steps to include a sum in respect of commission and non-voluntary overtime in their calculation of holiday pay.
- Decide which element of holiday pay you wish to adjust:as set out above, employers are only required to apply any increase in holiday pay to the four weeks leave granted by the WTD, not the additional 1.6 weeks of leave that employees get under UK law. If you choose to maintain this distinction it may save money but will mean applying two rates of holiday pay which is likely to create an administrative burden. Weigh up the relative benefits of each approach in light of the impact it will have on your specific business.
- Identify potential back pay liability:this process is important in terms of making provision in the company’s accounts to deal with any claims which may arise. It will also assist the business in deciding how to manage such claims, for example deciding whether and at what level to try and negotiate settlement. The good news is that claims for back pay issued from 1 July 2015 are subject to a cap of two years.
- Update policies and contracts, if necessary: review and amend all contractual and policy documents to reflect any changes to the way that holiday is calculated. Bear in mind the wider issues associated with such changes, for example contractual changes will require consent/consultation as usual.
- Prepare key people for change: once you have determined what, if any, changes are required ensure that managers and those who play a part in the administration of holiday and payroll are fully appraised of the new system via appropriate training. This is an issue which has already received significant media coverage so workers are likely to have questions about how it will affect them. To manage this and ensure a consistent approach, consider appointing one person/department to whom such queries should be directed.