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Just when we thought that there might be a degree of certainty over the calculation of holiday pay, it seems it may be a case of one step forward and two steps back!
The starting point
To break it down, employees are entitled to a minimum of at least 5.6 weeks’ holiday each year, inclusive of bank/public holidays. This is made up of 4 weeks’ basic entitlement according to the EU Working Time Directive (WTD), plus an additional 1.6 weeks’ under the UK Working Time Regulations (WTR), which came into effect in 2009.
During any period of holiday, employees are entitled to be paid their “normal remuneration”, though the definition of “normal remuneration” has been hotly debated. There have been a number of cases over the past few years that have gone through the courts to determine that “normal remuneration” includes payments for overtime and commission.
However, overtime and commission payments only need to be included in holiday pay that relates to the 4 weeks’ basic holiday entitlement; not the additional 1.6 weeks’ holiday or any additional contractual holiday entitlement.
One area that was still causing some confusion was the issue of voluntary overtime where there was no obligation on the employer to offer overtime, or on the employee to work overtime.
A step forward
The problem is that voluntary overtime is not necessarily a regular and frequent commitment and it can fluctuate throughout the year. For example, those working in the hospitality industry may work considerably more overtime in the summer months or over the Christmas period. The question then becomes: do payments for such voluntary overtime form part of “normal remuneration”?
A recent case heard by the Court of Appeal (East of England Ambulance Service NHS Trust v Flowers) has now confirmed that voluntary overtime that is worked in a pattern that is sufficiently regular and settled does in fact count as “normal remuneration”. To recap: this is overtime that the employer has no obligation to offer and the employee has no obligation to accept, but that is regularly worked.
Although this does move us forward, it still leaves employers pondering some practical and administrative implications, such as:
- Do we assess overtime worked on an individual basis to establish whether it is sufficiently regular, or do we include all overtime for ease of administration?
- What is the correct reference period for calculating holiday (particularly where there is significant seasonal fluctuation)? In any event, the statutory reference period is due to increase from 12 weeks to 52 weeks in April 2020, so perhaps that will at least simplify one aspect of the calculation.
- Do we include voluntary overtime in all holiday pay or only pay that relates to the basic 4 weeks’ holiday entitlement under the WTD?
So far so good, BUT…
Two steps back?
When a disgruntled employee makes a claim in relation to holiday pay, this is usually brought as a claim for a series of “unlawful deductions from wages” because the employee believes that they have been paid less than they are entitled to over an extended period of time (e.g. they may not have been paid holiday pay taking into account voluntary overtime hours worked). One of the earliest cases in the holiday pay saga (Bear Scotland Ltd v Fulton) confirmed that a break of more than three months in a series of deductions would break the series.
This was good news for employers as it meant that there was a limit on the amount of back pay that could be claimed. This restriction is also reinforced by a statutory two year backstop on the sums that can be claimed where a claim has been brought on or after 1st July 2015.
However, recent developments have cast doubt on the lawfulness of such limitations and opened up the prospect of employees claiming significantly greater amounts of back pay (where employers have not already revised their calculations and the last ‘deduction’ was less than three months ago):
- The Court of Appeal in Northern Ireland decided in the case of Chief Constable of Northern Ireland Police v Agnew that a series of deductions was not automatically broken by a gap of more than three months, or by an instance of a correct payment. It also found that WTD, WTR and contractual holiday were not taken in a particular order and were indistinguishable from each other (this is significant as many employers have argued, or expressly stipulate, that WTD holiday is deemed to be taken first so that it is highly likely there would be a break in a series of deductions). Although this decision is not binding on Tribunals/Courts in Great Britain, it is likely to reopen that particular can of worms as the wording on unlawful deductions in the relevant Northern Irish legislation is the same as that under the Employment Rights Act.
- Separately, the European Court of Justice in the case of King v Sash Windows has suggested that the statutory two year limitation period is incompatible with EU law, but the case settled before returning to the Court of Appeal, so the backstop remains for now.
Action for employers
Claims still have to be brought within three months of the date of the last underpayment. Therefore, to minimise the risk of significant claims for back pay, employers should revise their holiday pay calculations sooner rather than later to reflect the Court of Appeal decision that voluntary overtime that is worked in a regular and settled pattern does count as “normal remuneration” and should therefore be included in the calculation of holiday pay.
In a world of uncertainty (let’s not even mention the “B” word) one thing is certain – we haven’t heard the last on holiday pay so stay tuned!
We have worked with a number of clients to assist them in implementing workable holiday pay arrangements, underpinned by appropriate terms and conditions and policies. If you would like more advice, get in touch for a friendly and informal chat today. Call 01622 759 900 or email firstname.lastname@example.org.