The on-going saga of how UK businesses calculate holiday pay for their employees has taken a fresh turn following an important decision in the Northern Ireland Court of Appeal which was announced today (26 June 2015).

In the case of Patterson v Castlereagh Borough Council the NI CA said that there was no reason in principle why voluntary overtime should not be included in holiday pay.

Background to the case

A number of overtime claims were brought against the Council.  Mr Patterson’s was run as the ‘test case’ on the issue of whether purely voluntary overtime should be included in holiday pay.  Voluntary overtime is generally agreed to reflect overtime which the employer is not obliged to provide and which the employee can work or reject.

Over a reference period of 13 weeks, Mr Patterson worked 52 hours, an average of 4 hours per week.  This amounted to additional pay of £60 per week.  He only received basic pay during his holiday and argued that this amounted to a series of unlawful deductions.

The relevant provisions in the Northern Irish Working Time Regulations reflect those in the UK.

Industrial Tribunal decision

The Industrial Tribunal (as they are still known in Northern Ireland) originally found that purely voluntary overtime should not be included because it said this had been specifically excluded by the Employment Appeal Tribunal in the joined cases of Bear Scotland

There is no Employment Appeal Tribunal in Northern Ireland and Mr Patterson appealed to the NI Court of Appeal on the basis that the lower Tribunal had mistakenly interpreted the EAT’s comments in Bear Scotland.

NI Court of Appeal decision

By the time the case came before the NI Court of Appeal, lawyers acting for both the employees and Council agreed that the Tribunal had mistakenly interpreted the decision in Bear Scotland.

The NI Court of Appeal agreed and found that there is no reason in principle why voluntary overtime should not be included in holiday pay. 

The case was remitted back to the Tribunal to determine whether or not Mr Patterson’s claim would succeed.

What this means

The decision in Bear Scotland laid the foundations for this decision as it was difficult to see why purely voluntary overtime should be treated differently from compulsory overtime if it was worked regularly (i.e at certain times of the year) or frequently (i.e. often). 

Decisions in Northern Ireland are not binding in England & Wales, but we expect this decision to be persuasive and to affect the outcome of future cases in England, Wales and Scotland.  That said, the court was “at pains” to point out that its comments should be treated with a ‘degree of caution’ because it did not hear full arguments on the issue (this was because the parties were in broad agreement about the principle that voluntary overtime had not been excluded by the EAT in Bear Scotland).

Is it likely that all voluntary overtime will have to be included?

This decision is limited to the principle of including voluntary overtime in holiday pay and it does not mean that every hour of voluntary overtime worked will have to be reflected.  This is because employees are entitled to ‘normal pay’ during a period of holiday.  There is no statutory definition of what amounts to ‘normal pay’ and Tribunals will continue to hear arguments about whether overtime (of whatever nature) has become part of an employee’s normal pay. 

In some cases this will be easy to determine and the employee will be able to point to a regular (in terms of it being done at regular times of the year) or frequent (in terms of it being done often) pattern of worked overtime.  In others, it will be less obvious and we would expect ad hoc overtime to be excluded. 

These questions will also raise issues about the correct reference period and we anticipate that some workers, particularly those who work irregular or ad hoc overtime will seek to argue that all overtime worked should be averaged over a longer reference period.

Does overtime have to be included in all holiday pay?

No.  Even if this case is followed and voluntary overtime has been regularly worked, it is still open to employers to limit payment to the first 20 days’ of leave taken in accordance with the principle established Bear Scotland.

Will this decision expose employers to backdated claims for voluntary overtime?

No.  The position remains that employees who have a break of more than 3 months between payments will not be able to argue that they have suffered a series of deductions.  This is because the requirement to include non-guaranteed overtime only relates to 20 days' leave required under the Working Time Directive holiday and not to additional leave.

What happens now?

The NI Court of Appeal in this case was critical of the lack of detail pleaded and said that ‘attempting to isolate the question of principle without establishing the underlying factual basis has contributed in no small measure to the unsatisfactory outcome of this case.’  

As a result it will now be left to the Tribunal to ascertain whether Mr Patterson’s case has any merit.

Tribunals in Scotland are staying cases and identifying test cases to determine a number of issues that remain outstanding.  Tribunals in England and Wales do not have a consistent practice but many are lifting stays and requiring employees to properly detail the amount claimed and how this has been calculated. 

This is potentially very helpful for employers and we hope it will lead to poor or speculative claims, for example those that are clearly out of time due to the series of deductions being broken, being sifted out or abandoned at an early stage.  It will also give employers a much better idea of the potential value of these claims and enable them to decide whether to settle at an earlier stage.