Time for a holiday? The next instalment in the holiday pay saga…..

07 November 2018

Author: Sarah Cochrane
Practice Area: Employment Law

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The much awaited decision of the Industrial Tribunal in the matter of Agnew & Others v Chief Constable of Northern Ireland and David Brian Anderson and Others v Police Authority of Northern Ireland (“the Police Cases”) has been issued.

Employers will undoubtedly be well-versed in the background to this issue which put at its simplest is – how should holiday pay be calculated?

It is clear from developing case law at European and Domestic level (starting with the case of Bear Scotland v Fulton [2015] CMLR 40 (“Bear Scotland”)) that employees and workers should receive their normal remuneration whilst on holiday. Paying only basic pay to an employee or worker who is on holiday is not compliant with the Working Time Directive (“WTD”).

The developing case law has also provided clarity around the types of payments that should be included in holiday pay calculations, namely any payments that are intrinsically linked to the role including overtime (voluntary, guaranteed and non-guaranteed),shift bonuses and commission. Any payments which are simply to reimburse employees or workers for expenditure e.g. a meal allowance should not be included.

Despite the various cases, there are still many unanswered questions. The decision in the Police Cases seeks to address a number of these issues which are discussed below:

1. The reference period over which normal remuneration should be calculated remains in question. In our experience, many employers have been using a 12 week reference period i.e. if an employee or worker takes a week’s leave, their holiday pay would be calculated as an average of the 12 weeks preceding the holiday period. Whilst this was undoubtedly a “best guess” approach in the absence of any certainty from the courts on the issue, it was an informed “guess” given that a 12 week reference period is used to calculate a week’s pay for the purposes of redundancy calculations for example.

In the Police Cases, the Claimants argued that the appropriate reference period should be 12 months whilst the Respondents argued that a 12 week reference period was appropriate. The tribunal commented that “the purpose of a reference period is to assess what normal pay was in each individual case” and therefore “this is one of those situations where the issue must be determined by reference to the individual facts of each individual case”.

Turning to look at specific examples, the tribunal commented that where a particular claimant works a level of overtime that rarely alters, it may be appropriate to use a 12 week reference period. This was contrasted with an individual who worked in a “quiet area” where “overtime may well be relatively minimal for most of the year and may become substantial during July and August”. In such a case, it was the tribunal’s view that it “may well be arguable that an appropriate and representative reference period would be 12 months to look at the relevant claimant’s normal pay in the ordinary sense of the term”.

The lack of a fixed reference period undoubtedly leaves any decision by an employer in relation to an appropriate reference period open to challenge by an employee or worker. Employers keen to address this risk, may be influenced by the tribunal’s comments that “there are significant administrative reasons for adopting a straightforward 12 month reference period”. Whilst this would clearly be administratively easier to manage than having a variety of reference periods, we would suggest that it may result in higher levels of holiday pay being paid than is strictly required given that a 12 month reference period captures a much longer period and hence more one-off payments which are not sufficiently regular to count as “normal” remuneration.

2. Claims for holiday pay are brought as unlawful deduction from wages claims. A claim for unlawful deduction from wages must be brought within three months from the date of the deduction or where there has been a series of deductions, three months from the date of the last deduction.

In Bear Scotland, the Employment Appeals Tribunal (“EAT”) determined that any such series is automatically broken by a gap of three months or more between relevant deductions i.e. between relevant calculations of holiday pay. In the Police Cases, the Claimants argued that they could claim as far back as 1998 when the Working Time Regulations 1998 (“WTR”) came into force or to the date when the first incorrect payment was made (whichever was later). The Respondent argued (in accordance with the EAT’S conclusions in Bear Scotland) that any series is automatically broken by any gap of three months. The Respondents also argued that the series was broken by compliant payments of holiday pay, by payments made in respect of holiday outside of the 20 days to which individuals are entitled under the WTD and by gaps in working caused by e.g. sickness absence or maternity leave.

In the Police Cases, it was the “unanimous decision of the tribunal” that the EAT’s “decision is wrong and should not be followed in this jurisdiction”. It concluded that “the word series should be given its ordinary meaning and should be judged on the circumstances of each individual case”. It further concluded that neither a correct payment nor a gap in attendance at work can amount “to an automatic break in the ordinary meaning of the word series”.

So where does this leave employers in Northern Ireland? Unfortunately, the Police Cases did not give any specific guidance on the issue of what does in fact break a series of deductions, clearly leaving employers open to potential claims back to 1998 (when the WTR came into force) or an employee’s start date (whichever is later). One can surmise that if the payment (e.g. overtime) was not sufficiently regular at any point in the past so as to constitute “normal” remuneration, then that could potentially break the chain however bearing in mind the tribunal’s own example of one hike in overtime in July and August being included in the reference period, successfully arguing a break in the series of deductions is now unquestionably more difficult.

It is important to bear in mind that the situation with regard to back-pay and potential claims is somewhat different in GB given the terms of the Deduction from Wages (Limitation) Regulations 2014. The Regulations limit the scope for backdating claims to 2 years before the date of the claim. The judgment in the Police Cases references the Regulations, noting that they are not applicable in Northern Ireland and that it is unclear in the tribunals’ view how those Regulations could “properly be regarded as ensuring compliance with the fundamental rights granted to those workers under the Working Time Directive”.

3. The decision in Bear Scotland and subsequent cases only relates to WTD holiday i.e. 4 weeks holiday. Despite this concept being widely accepted, it remained unclear as to which 4 weeks within any holiday year represented an employee’s holiday as afforded to him or her under the WTD.

The tribunal in the Police Cases concluded that “it would make no sense to treat any part of the annual leave entitlement which comprises those three categories [i.e. WTD, WTR and holiday provided under the contract], differently from any other part of the annual leave entitlement or to require a strict succession of types of leave”. It concluded that the “only sustainable interpretation is that days of annual leave awarded on whatever basis form part of a composite whole”. “Each day’s annual leave therefore must be treated as a fraction of a composite whole”.

On the tribunal’s conclusions, it is no longer viable for employers to argue that “normal remuneration” should only be paid for a pre- determined 20 days’ holiday in the holiday year. Strictly, the conclusions of the tribunal mean that a proportion of each day’s holiday pay should be calculated with reference to “normal remuneration” and the remainder can be calculated on the basis of basic pay. This leaves employers in real difficulty and one can foresee a situation that for administrative convenience employers feel forced to pay normal remuneration for all periods of holiday, when they are not legally required to do so.

Clearly, the Police Cases leave employers in somewhat of a dilemma. Should they maintain the status quo (e.g. using 12 week reference period and / or maintaining robust arguments in relation to what constitutes a series of deductions) and await further developments through the appellate courts (the tribunal itself in the Police Cases acknowledged appeals to be inevitable)? Alternatively, should employers seek to comply with the Police Cases judgment and further alter practices and endure the cost and administrative burden of doing so, in the full knowledge that they may find themselves in the same dilemma in 12 months’ time. Clearly there is no one size fits all approach however one thing is becoming increasingly certain- determining an issue as significant as the calculation of holiday pay through the court process is altogether unsatisfactory for employers, workers and employees as a whole.

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