Holiday pay: case law update

Dentons

The calculation of holiday pay has been the subject of a number of cases over recent weeks. There are take-aways for employers in the decisions in Neil Flowers and others v. East of England Ambulance Service (NHS Trust) and Chief Constable of Northern Ireland Police v. Agnew

Neil Flowers and others v. East of England Ambulance Service (NHS Trust)

Thirteen members of staff working in various roles for the ambulance service brought claims for unlawful deduction of wages on the basis that their holiday pay was not being calculated correctly. The claimants argued that the ambulance service was acting unlawfully by failing to take account of overtime when calculating their holiday pay. They advanced their claims on two bases: a contractual entitlement under the NHS terms and conditions of service (known as the "Agenda for Change" terms and conditions) and Article 7 of the Working Time Directive, which guarantees four weeks of holiday to be paid at the same level as the employee's "normal remuneration".

Taking the two bases for the claim in turn, in relation to the contractual claim, the Court of Appeal held that (as a matter of construction) the terms and conditions of service created a contractual entitlement to have overtime taken into account for the purposes of calculating holiday pay, regardless of the position under the Working Time Directive i.e. whether normally worked or not.

In relation to the claim made under the Working Time Directive, the Court of Appeal confirmed that holiday pay under the Working Time Directive must include regular voluntary overtime and it is for tribunals to determine, on a case-by-case basis, whether a particular pattern of voluntary overtime is sufficiently regular and settled. 

The court expressly approved the EAT's decision in Dudley Metropolitan Borough Council v. Willetts, where it was held that the overarching principle established by the Court of Justice of the European Union (CJEU) case law was that holiday pay should correspond to normal remuneration so as to not discourage workers from taking annual leave. 

Significantly, the court also commented on the CJEU's remarks in Hein v. Albert Holzkamm GmbH & Co. KG. In that case, the CJEU held that "given its exceptional and unforeseeable nature, remuneration received for overtime does not, in principle, form part of the normal remuneration that a worker may claim in respect of the paid annual leave provided for in [Article 7 of the Working Time Directive]". The Court of Appeal in Flowers commented that this wording appeared to contradict previous CJEU case law and would undermine the principle that employees should not be deterred from taking proper rest breaks. The Court of Appeal, therefore, did not accept that the CJEU intended to perform a "handbrake turn" with such comments, and held that the intention was simply to draw a distinction between "exceptional and unforeseen" overtime and "regular and predictable" overtime. 

For NHS organisations, the impact of this case is clear. When calculating holiday pay for all staff employed on the Agenda for Change terms and conditions of employment, NHS organisations need to take into account all voluntary overtime worked in the reference period preceding the annual leave – even if irregular and not "normally" worked.  

However, the case is also relevant to non-NHS employers as it removes the uncertainty about the treatment of voluntary overtime which arose from the CJEU's recent decision in Hein.  Businesses will have to consider whether a particular worker's voluntary overtime meets the threshold of regularity. Although in some cases it will be clear whether the overtime is regular or not, there are likely to be a large number of instances where this is not clear and employers will have to consider the point at which a pattern of voluntary overtime becomes regular. As increasing numbers of employers engage in this assessment, it is anticipated that this question will inevitably be the subject of further employment tribunal proceedings. We will keep you up to date with any further developments. 

Chief Constable of Northern Ireland Police v. Agnew

The Northern Ireland Court of Appeal (NICA) has also considered a number of holiday pay issues in its judgment on an appeal from the Northern Irish Industrial Tribunal. 

The NICA held that a gap of three months or more between alleged underpayments did not necessarily prevent workers from pursuing claims in relation to holiday pay shortfalls and declined to follow the decision of the EAT in Bear Scotland Ltd v. Fulton. Instead, the NICA held that the central consideration is whether there was a "sufficient similarity of subject matter, such that each event is factually linked with the next...in the alleged series" of underpayment. The court decided that the three month rule could lead to "arbitrary and unfair results" and, as a matter of the proper construction of the Employment Rights (Northern Ireland) Order 1996 (ERO), concluded that a series is not necessarily broken by a gap of three months or more. 

The NICA also held that, in this particular case, miscalculations of employees' holiday pay had arisen because holiday pay had been calculated on basic working hours and not the actual hours worked, including overtime.

In Northern Ireland, the two-year time limit which applies to claims of unlawful deduction in rest of the UK does not apply, so the decision regarding the three-month gap in Agnew has potentially very significant consequences. For the Police Service of Northern Ireland, this decision means that back payments of more than £30 million are due to its staff. 

The case clearly has implications for other employers who have staff located in Northern Ireland, as it potentially increases the cost of any historical holiday pay claims brought in Northern Ireland. 

As the case was decided by the NICA, it is not formally binding on tribunals in the rest of the UK (who are still required to follow the three-month position set out in Bear Scotland Ltd). However, the wording in the Northern Irish ERO and the UK's Employment Rights Act 1996 are identical, and aspects of Agnew may therefore provide strong persuasive authority for any future appeal which argues that the decision in Bear Scotland Ltd was wrong. It remains to be seen if the case will be appealed to the Supreme Court – if an appeal is made, the outcome will be binding throughout the UK, so employers outside Northern Ireland should watch this space. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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