Northern Ireland Court of Appeal upholds Employment Tribunal Decision on calculating Holiday Pay
The Northern Ireland Court of Appeal (NICA) Judgement this week sent shockwaves through organisations; employers had been hoping for some good news but will be bitterly disappointed.
The Judgement substantially upholds the Belfast Employment Tribunal Decision of 2 November 2018 that found the PSNI & the Police Authority for NI liable for not including overtime payments and certain allowances in the calculation of the holiday pay of police officers and civilian staff (Alexander Agnew and others v Chief Constable of the PSNI & others CRN: 01112/16).
We have set out below a summary of the NICA’s key findings and what these mean for employers:
1. The meaning of “Worker” in the Employment Rights Order (NI) 1996 and the EU principle of Equivalence
The NICA had to determine if a police officer was a “worker” and thereby was able to bring an unlawful deductions claim under the 1996 Order. If not, whilst they had a remedy under the Working Time Regulations (WTR), there is no provision in the WTR to deal with underpayments that are part of a series which seriously limited their ability to claim for historical underpayments.
The Court held that police officers do not fall within the statutory definition of a “worker.” However, the Court then went on to consider whether the principle of “Equivalence” operates to mean they must be treated as being entitled to the more generous regime provided under the 1996 Order.
We address this briefly as it is unlikely to be of relevance to many employers, however we note that it could have implications for other “status” type claims especially with the growth of different forms of contracts and different types of working.
The NICA held that the police officer Claimants were able to pursue their claims of a series of underpayments; in reaching this finding the Court read words into the WTR thereby giving the non-worker PSNI officers the same rights as their civilian counterparts have under the 1996 Order.
In doing so the NICA acknowledged the PSNI’s argument that this substantially changed the time limits in the WTR, but the Court stated it was considered appropriate to do so.
2. The meaning of “a series of deductions”
The NICA found that a series of deductions is not automatically broken by a gap of 3 months between unlawful deductions nor is it ended by a lawful payment
The Court resoundingly rejected most of the Bear Scotland findings that restrict a worker’s ability to bring retrospective claims based on them being outside of the 3 month time limit. This means that, for example, an occasional correct payment in a series of payments or a 3 month period when the worker did not take annual leave or receive any holiday payment may not break the chain/series of underpayments as the correct payment or period could be ignored linking the series of underpayments that occurred before and after.
This is one of the most concerning findings for employers. It appears the rationale behind this is that the series continues as long as the intention to underpay persists. This raises concerns about the potential for significant back pay claims. In light of this any employer not currently including regular overtime payments (including voluntary overtime) in the calculation of holiday pay should rectify this urgently and seek legal advice where appropriate.
3. Is annual leave entitlement to be taken in a particular sequence?
Prior to the Decision of the Belfast Employment Tribunal it had been generally accepted as logical that workers take their annual leave in a sequence; namely the 4 weeks paid leave under the WTD, followed by the further 8 days entitlement under the WTR and then any additional contractual holiday in excess of 28 days.
The Belfast Employment Tribunal introduced the new concept that, rather than leave being taken in strict succession, each day of annual leave should be treated as a fraction of whole entitlement. The NICA upheld this stating “a worker has an entitlement to all leave from whatever source and there is no requirement that leave from different sources is taken in a particular order.”
The effect of this is that each day of annual leave must now be treated as being made up of a fraction of WTD leave, WTR leave and, if relevant, contractual leave (the “composite whole”.)
From a practical perspective, this causes real difficulties, as it is arguable that every day of annual leave attracts enhanced WTD rights. It also complicates matters in that if only a fraction of the day attracts WTD rights, it is only that fraction to which the enhanced rate of pay applies. Practically employers may find it administratively easier to apply the enhanced rate to all annual leave days to avoid complicated calculations, but this will inevitably this will increase the costs of holidays for employers.
4. The method of calculation of the amount of overtime to be taken into account in holiday pay
The NICA considered how to fairly calculate the daily rate of holiday pay. In a section of the Judgement that set out various mathematical calculations the Court addressed the central question whether the daily rate should be achieved by dividing the total pay received during the reference period by the number of calendar days in the reference period or the number of working days in that period.
Using an example of a 12-month reference period the Court held it would not be correct to divide the total pay by 365 as it uses both working and non-working days as the divisor. In this example a divisor of 260 was deemed appropriate on the basis there are 260 working days in a 12-month period (assuming a 5 day working week.)
In respect of these claims the NICA method of calculation has the effect of increasing the total estimated liability for PSNI from £30 Million to £40 Million.
5. The identification of the appropriate reference period
The parties agreed that the appropriate reference period for the assessment of “normal pay” would be a question of fact in each case and the NICA emphasised this.
The Court encouraged the parties to agree a pragmatic and administration-friendly method for calculating and paying “normal pay” based on averages taken over a rolling 12 month period immediately preceding the period of leave; but stated there is no obligation on them to do so.
Implications for employers
Employers not including overtime payments and other normal payments in the calculation of holiday pay should take immediate steps to assess and mitigate the potential exposure to claims and consider taking specific legal advice.
Employers who have no ongoing holiday/overtime claims and who have been correctly including overtime payments in the calculation of holiday pay shouldn’t be too alarmed.
If you have been correctly paying holiday pay for some time, the risk of a new claim being in time is low. You should however carry out an analysis whether the reference period you apply is representative of individuals’ working patterns to give an accurate representation of “normal pay.”