Holiday pay in the news again

With the holiday season upon us (although it’d be nice for last years heat wave to make a return, wouldn’t it?), we have been helpfully provided with two further cases which will potentially change the way employers calculate their employees’ holiday pay.

Voluntary overtime

The Court of Appeal has recently upheld the Employment Appeal Tribunal’s (EAT) decision in the case of Flowers v East of England Ambulance Trust that voluntary overtime should be taken into account when calculating holiday pay. For the facts and background of the EAT case see our earlier blog here.

Importantly, the Court of Appeal agreed with the EAT’s interpretation that holiday pay should maintain “normal remuneration” during periods of annual leave. 

In confirming this, the Court of Appeal also clarified an earlier seemingly contradictory European Court of Justice (CJEU) case. In the case of Hein v Albert Holzkamm GmbH, the CJEU stated that overtime should not be included when considering the normal remuneration of the worker as it is “exceptional and unforeseeable in nature”, yet in the same decision it also held that overtime work should be included where it is carried out “on a broadly regular and predictable basis”.

In the Flowers appeal, the Court of Appeal took it upon itself to reconcile the two statements by simply drawing a distinction between exceptional and unforeseeable overtime payments on the one hand and broadly regular and predictable ones on the other. Accordingly, the Court of Appeal held that the overtime worked by the claimants in Flowers, including voluntary overtime, was broadly regular and predictable and, as such, should be taken into account in the calculation of the employees’ holiday pay.

The take away message for employers is that, when overtime is regular and foreseeable, it should be included in the calculation of an employee’s holiday pay. This applies regardless of whether the overtime is voluntary or compulsory. To the extent that it hasn’t happened already, employers are advised to carry out an audit of their approach to calculating holiday pay to ensure that it includes overtime in a way which is in line with the Court of Appeal’s most recent decision.

Breaking the break in long-term holiday backpay claims

You may no doubt already be familiar with the 2014 case of Bear Scotland Ltd v Fulton (beware the Bear), in which the EAT decided that a gap of more than three months between non-payments or underpayments of holiday pay would break the “series” of deductions required to bring an unlawful deduction from wages claim for underpaid holiday pay. 

Now, however, a case has come along which potentially challenges this approach. The Court of Appeal in Northern Ireland (NICA) in Chief Constable of Northern Ireland Police v Agnew held that neither a gap of more than three months in a series of holiday pay deductions, nor an instance of a correct payment, should guarantee a break in a series of deductions. Speaking in the NICA, Lord Justice Stephens agreed with the claimants that such a rule could lead to “arbitrary and unfair results” and held that instead what constitutes a series should be determined by the facts of that particular case.

It has been estimated that this decision could cost the respondent £30m, with some claims stretching back 20 years. The cost implications for other employers in Northern Ireland, who may now face similar claims, could be significant. 

But what is the impact for employers in England and Wales? Since this is a case decided by the NICA, its decision is only binding in Northern Island. However, given the money at stake, it seems likely that the decision will be appealed, which would go to the Supreme Court. Any decision there will be binding on the English and Welsh courts and tribunals as well, so we’d all be well advised to watch this space.

In the meantime, the employment tribunals in England and Wales are still bound by the EAT decision in Bear Scotland and the three-month rule. However, the NICA’s decision certainly increases the likelihood that claimants will appeal any employment tribunal decisions which apply this rule and will give employees some persuasive arguments to use on appeal. The potential advantage which employers in England and Wales (currently) have compared to employers in Northern Ireland, is that since 2015, statute here has limited claims for underpaid holiday pay to two years’ backpay (rather than 20 years like some of the claimants in Agnew). Some comfort for employers, for the time being at least…  we’ll keep you updated! 

With thanks to Caitlin Farrar for helping to prepare this piece.

If you require further information about anything covered in this blog, please contact Rachel Nolloth, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2019