Holiday pay update: What did the NI Court of Appeal say on voluntary overtime? And a new 2 year limit on back-dating claims from 1 July

Holiday pay has been a key issue making the headlines in employment law over the past year or so. Case law has indicated that holiday pay should reflect a worker’s normal remuneration.  However, the strict formula set out in our legislation for calculating holiday pay does not necessarily achieve this outcome, creating uncertainty for employers as to whether they are liable for incorrectly paying holiday in the past and how they should pay holiday going forward.

The two key decisions for employers to date are:

• Lock v British Gas in which the European Court of Justice confirmed that commission which is normal remuneration should be reflected in holiday pay calculations.Whether or not our UK rules on holiday pay can be interpreted to reflect this is currently on appeal to the Employment Appeal Tribunal (“EAT”) (see here); and
• the EAT decision in the Bear Scotland case which confirmed that regular non-guaranteed overtime should also be included in calculations for holiday pay (see here). Non-guaranteed overtime is overtime which an employer is not obliged to offer but if it does, the employee must work it.

What did the Court of Appeal in Northern Ireland say regarding voluntary overtime?

The Bear Scotland case did not deal specifically with voluntary overtime where an employer is not obliged to offer overtime and an employee is not obliged to work it, if it is. However, many employers have recognised the risk that regular voluntary overtime may equally well be considered to be normal remuneration and hence should be reflected in holiday pay.

In a judgment handed down last week in Patterson v Castlereagh Borough Council, the Court of Appeal in Northern Ireland held that voluntary overtime should be included in holiday pay. Although this decision is not binding on employers in England and Wales, this case could be used in the courts as part of a persuasive argument.

The Northern Ireland Court of Appeal referred to both Lock and Bear Scotland in making their decision concluding that:

“there is no reason why voluntary overtime should not be included as part of a determination of entitlement to paid annual leave. It will be a question of fact for each Tribunal to determine whether or not that voluntary overtime was normally carried out by the worker and carried with it the appropriately permanent feature of the remuneration to trigger its inclusion in the calculation.”

This decision is unsurprising, particularly as here the employer’s legal representative had conceded that there was no reason in principle why voluntary overtime should be included. Another case may see more robust legal arguments raised. However, the real interest for employers will lie when the case returns to the Northern Ireland Industrial Tribunal on whether the voluntary overtime in this case was appropriately permanent and the reference
period over which it should be calculated. This may give some clues as to how an Employment Tribunal in England and Wales might determine a similar case.

Employers are therefore still left with tricky questions, particularly regarding whether voluntary overtime worked at certain times of years, such as Christmas or Summer sales is sufficiently permanent to constitute normal remuneration and the reference period over which a holiday pay calculation should be based.

New two year limit on back-dating claims

This coming Wednesday also marks the date on which the two year cap on back pay in holiday claims comes into play (see here).

Claims for wrongly calculated holiday pay can be brought under the unlawful deduction of wages provisions in the Employment Rights Act 1996, which provided there is an unbroken series, may technically extend back many years. Whilst the EAT in Bear Scotland indicated that a chain of unlawful deductions would break if there was more than a three month gap between them, many individuals holiday patterns may still mean that the chain extends back many years. From 1 July any new holiday pay claims lodged in the Employment Tribunal will only be able to extend back a maximum of 2 years.

For further information on this and any other holiday pay issues, please do  not hesitate to contact  your usual OC Contact.