Holiday pay: overtime and commission update
We look at the recent developments in holiday pay, including a Northern Ireland ruling suggesting that voluntary overtime could be included in the calculation of holiday pay.
There have been a number of recent developments in the ongoing saga of what should be included in the calculation of holiday pay, and we look at the latest points that employers need to be aware of:
Two year limit on backdated claims now in force
1 July saw the two-year limit on backdated claims for unlawful deduction of wages claims take effect. Where an individual issues a claim on or after this date, arguing there has been a series of underpayments (whether that is holiday pay or other unlawful deductions) going back several years, an Employment Tribunal (ET) can only consider the underpayments up to two years before the claim. Whilst the limitation provides some level of certainty where no claim has yet been issued, it does not affect claims issued before 1 July, which could still go back many years. However, following the combined cases of Bear Scotland Ltd v Fulton; Hertel (UK) Ltd v Wood; and Amec Group Limited v Law last year, regardless of when the claim was issued, the employer could argue that there was a break of more than three months in the 'series' of underpayments thereby preventing the claim being backdated beyond that point – please see our full article on the overtime cases of Bear Scotland etc.
Northern Ireland Court suggests holiday pay should include voluntary overtime
On 26 June an interesting judgment published by the Court of Appeal in Northern Ireland has suggested that there is in principle no reason why voluntary overtime should not be included in the calculation for holiday pay. Many employers will remember that the overtime cases from last year only dealt definitively with the question of non-guaranteed overtime (i.e. overtime which the employer is not obliged to offer, but which the employee must work if it is offered). The question of voluntary overtime (which an employee can refuse) was in theory left open, and many employers chose to ignore voluntary overtime in their holiday pay calculations.
However, it is our view that the direction of travel was clear from the rulings of the European Court of Justice (ECJ) and comments made by the Employment Appeal Tribunal (EAT) Judge in the overtime cases. In a 2011 claim by airline pilots against British Airways, the ECJ ruled that holiday pay must "be determined in such a way as to correspond to the normal remuneration received by a worker". The EAT judge in the overtime cases commented that "normal pay is that which is normally received". He also ruled that the UK holiday pay provisions which limit a person's weekly pay to their 'normal working hours' even if they work overtime beyond this, should effectively be ignored. Although the EAT judge did not deal with voluntary overtime, it seems unwise to assume that voluntary overtime doesn't need to be included.
A stronger argument is likely to be that the overtime is not regular or long-standing enough to amount to 'normal pay'. As it was noted in the overtime cases, "payment has to be made for a sufficient period of time to justify that label" (i.e. 'normal' pay). (Note that including overtime in holiday pay is only likely to apply to the minimum 4 weeks' holiday enshrined in EU law, not the additional 1.6 weeks' leave provided for in the UK. Employers are faced with different rules depending on whether the holiday taken is part of the EU-derived 4 weeks, the UK's additional statutory 1.6 weeks, or a further contractual entitlement over and above this.)
In the case of Patterson v Castlereagh Borough Council, a Northern Ireland Industrial Tribunal ruled that Mr Patterson's voluntary overtime did not need to be included in the calculation of his holiday pay. Mr Patterson appealed. In the Northern Ireland Court of Appeal, the employer's lawyer conceded that the Tribunal's decision had been wrong. The N.I. Court of Appeal pointed out that there had not been a full consideration of all the legal arguments, but agreed that the lawyer had "correctly conceded that in principle there is no reason why voluntary overtime should not be included" in the calculation of paid holiday. The Court referred Mr Patterson's case back to the Tribunal to hear evidence of the overtime he actually worked within a 'suitable reference period'.
Decisions of the N.I. Court of Appeal are not binding in England and Wales, but can be 'persuasive'. Whilst some employers will want to resist including any voluntary overtime until there is a binding decision, others may decide to include it or at least assess their potential exposure by checking whether individuals 'normally' do voluntary overtime and whether it has become a sufficiently permanent feature of their pay. The reference period used is likely to be the preceding 12 weeks, but further decisions in other cases (see below) could clarify this over the next few months.
The latest position on commission in holiday pay
Many will be aware that another hot topic is the question of commission as part of holiday pay. Following a ruling by the ECJ last summer, the Leicester Employment Tribunal determined in the case of Lock v British Gas Trading Limited that commission should be included in holiday pay.
In May British Gas announced that it is appealing this decision to the EAT, on the basis that the overtime cases are not related to the question of commission. The EAT hearing is not likely to take place until late this year, and in our view it is doubtful whether it would succeed. Even when the judgment is given, it is unlikely to clarify the question of what reference period employers should use in their calculations. Mr Patterson's case did not shed any light on the reference period either.
The lack of clarity both for commission and voluntary overtime causes continued uncertainty for employers. It could be risky to include these payments in holiday pay if the case law is reversed. Yet not including them risks exposure to claims of backdated underpayments (albeit now not going back so far). Other options include making one-off payments or keeping back reserve funds. In any event, it is essential that all employers get to grips with their potential liability to determine the best approach in each case and potentially change working practices if appropriate.