Another decision has been handed down to clarify – or complicate – the position on which aspects of pay should be included when calculating an employee's entitlement to holiday pay.
The Court of Appeal in Northern Ireland ("CA") has held that voluntary overtime is not necessarily excluded from the calculation of holiday pay for the purposes of the Working Time Regulations 1998 (as derived under the EU Working Time Directive).
The case of Patterson v Castlereagh Borough Council held that it was a "question of fact" for each Tribunal to determine whether or not voluntary overtime was "normally" carried out by the employee. If so, it should be considered to be part of the employee's "normal remuneration" and included when calculating holiday pay.
The case was remitted to the Tribunal to hear further evidence of the overtime actually worked by the employee within a suitable reference period. Once this is determined, the Tribunal will decide as a question of fact whether the voluntary overtime should be included in this particular case.
There have been a number of recent cases about the scope of holiday pay and how this should be calculated. In brief:
Williams and others v British Airways plc – held that holiday pay should not be calculated by reference to basic salary, but should correspond to "normal remuneration".
Lock v British Gas Trading Limited – held that holiday pay under the Working Time Directive cannot be calculated on basic pay alone where remuneration also includes commission. Please see the link to our previous blogs on this case here and here.
Bear Scotland Limited v Fulton and another – held that there should be an intrinsic or direct link between holiday pay and the work the worker is obliged to carry out. It was held that "non-guaranteed overtime" (i.e., where employees were required to work, but which employers were not obliged to offer) should be included when calculating holiday pay. Please see the link to our blog here.
Whether voluntary overtime should be included in holiday pay calculations was not dealt with in the Bear Scotland case at EAT stage, and so the position remained unclear on this point. However, at the Tribunal stage for Bear Scotland, the Tribunal found that overtime that could be refused should be included in the calculation of statutory holiday pay, and it has been suggested in commentary that whether this should be included is fact-specific.
What was considered in the Patterson case?
At the Employment Tribunal stage, it was held that voluntary overtime should not be included in the calculation of holiday pay, taking the approach that the Bear Scotland case either implicitly excluded voluntary overtime, or it allowed Tribunals to decide to exclude it.
The key issue in question was whether the Tribunal had made a mistake by finding that, as a point of principle, voluntary overtime could not be included, or whether the Tribunal had decided that the appellant had factually failed to establish that the overtime formed part of his "normal remuneration".
The CA found that there was no reason why voluntary overtime should not be included as part of the holiday pay calculation, and that the Tribunal had been in error in this regard. It found that it was a question of fact for each Tribunal to determine whether the voluntary overtime in question was "normally carried out by the worker". If so, it should be included when calculating holiday pay.
Given that this is a Northern Ireland decision, it is not binding on Tribunals in England and Wales, although it will be persuasive.
The difficulty for employers putting a policy in place in relation to voluntary overtime, is that it seems Tribunals will look at whether an employee is entitled on a case-by-case basis.
However, where employees habitually work overtime, even if they are not required to do so, it is probable that they are entitled to holiday pay calculated by reference to this. This could have a high impact on employers, as voluntary overtime is likely to be more common than other forms of overtime. It would be prudent for employers to put policies in place to restrict the levels of overtime that employees may carry out, to try to control potential holiday pay costs.
A further difficulty is determining the correct reference period to calculate what the pay should be as no definitive guidance has been given on this point. Employers could use the 12-week period which is set out in legislation relating to other pay calculations, or alternatively the 12-month period suggested by the Advocate General in the Lock case. Again, it appears that a case-by-case basis will be the most appropriate (but also the most administratively difficult).
Finally, it is important to remember that where employers are obliged to include overtime in holiday pay calculations, this only applies to four weeks of the employee's holiday pay granted under the EU Working Time Directive (rather than the full 5.6 weeks prescribed by the Working Time Regulations 1998).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.