How should holiday pay be calculated? What is the relevant liability period? These are two questions that have been troubling many employers.
In Bear Scotland Ltd and others v Fulton and others, the EAT held that statutory holiday pay under Article 7 of the Working Time Directive was to be calculated by reference to ‘normal remuneration’ intrinsically linked to a settled pattern of work or by reference to ‘average pay’ over a defined period of time. Whilst many employers had typically paid holiday pay by reference to basic salary only, as a consequence of this decision non-guaranteed overtime is now required to be taken into account.
A question left unanswered by the Bear Scotland case was however, whether voluntary (non-compulsory) overtime would count towards statutory holiday pay i.e. overtime that a worker could elect to do but was under no obligation to do and the employer was under no obligation to provide.
The Court of Appeal in Northern Ireland has decided there is no reason in principle why it should not in the decision it gave in Castlereagh Borough Council v Patterson. The decision of the Court of Appeal in Northern Ireland, whilst interesting, is not binding on courts in England and Wales. Furthermore, as the Council had conceded the point, the decision should be treated with caution as the issue itself was not argued.
In this case Mr Patterson, the Claimant, was employed as an Assistant Plant Engineer and he regularly worked voluntary overtime for which he was paid time and a half. When the Claimant received holiday pay, which was calculated only by reference to his basic pay, he sued the Council for unlawful deduction of wages and argued that his voluntary overtime should be included as his ‘normal remuneration’. The Tribunal rejected Mr Patterson’s claim.
The Claimant appealed to the Northern Ireland Court of Appeal and argued that the Tribunal had misdirected itself by maintaining that Article 7 of the Working Time Directive did not require voluntary overtime to be taken into account in the calculation of statutory holiday. Castlereagh Borough Council conceded that if this was the Tribunal’s decision then it was an error. However the Council maintained that the Tribunal had found that Mr Patterson had failed to evidence that the voluntary overtime formed part of his normal remuneration for the purposes of calculating holiday pay.
The Court of Appeal found that the Tribunal had incorrectly interpreted the Bear Scotland decision by distinguishing between compulsory and voluntary overtime. The Bear Scotland decision in fact made no such distinction and simply confirmed that non-guaranteed overtime could be included in the calculation of holiday pay, leaving the question of voluntary overtime unanswered.
The Court of Appeal held that these scenarios should be decided on a case by case basis and it will be a matter of fact and degree as to whether voluntary overtime is consistent enough to be classified as ‘normal remuneration’.
Whilst there is no definitive formulae for determining how holiday pay should be calculated there is some good news. There is now certainty as to the maximum liability period in relation to holiday pay claims presented on and after 1 July 2015. The Deduction from Wages (Limitation) Regulations 2014 will now limit liability for historic holiday pay to two years. This means that employees are not able to claim pay going back, potentially, to 1998 when the Working Time Regulations came into force.