Northern Ireland Tribunal Decision on calculating Holiday Pay:  Costs and further complications for Employers

The Belfast Employment Tribunal recently 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).  The Decision was widely reported, and media reports suggest the total back pay bill may be as high as £30 million.

In reaching the Decision the Vice President of the Employment Tribunal made a number of significant, and some perhaps controversial, findings that increase the likelihood of larger claims going back a longer period of time. These findings include:

  1. A series of deductions is not automatically broken by a gap of 3 months. The basic legal position is that holiday pay claims must be brought within 3 months of the underpayment or within 3 months of the last in a series of underpayments. Here, the Vice President found that a gap on grounds such as illness, family leave, or where the worker simply has chosen not to take holiday for a period may not necessarily break the chain/series of underpayments. In other words, the gap could be ignored linking the series of underpayments that occurred before and after the 3-month gap;
  1. A series of deductions will also not be automatically broken by “compliant” holiday pay calculations (for example periods of correctly paid Working Time Regulation (WTR) annual leave) or by calculations about which there is no Tribunal complaint. This means that an occasional correct payment in a series of payments may not break the chain/series of underpayments. As above, the correct payment could be ignored linking the series of underpayments that occurred before and after the correct payment;
  1. As employers are aware annual leave consists of 20 days provided by the European Working Time Directive (WTD), 8 days provided by the UK Working Time Regulations (WTR) and in some cases further contractual holiday in excess of 28 days. Until this Decision, where the employer had not nominated which days were the WTD/WTR days etc, the settled opinion was that leave was taken in strict succession; in other words the 20 WTD days were taken first, followed by 8 days WTR and finally any contractual leave.  The Vice President found this incorrect and stated instead that each day of annual leave is treated as a fraction of whole entitlement.  He introduced the new concept that each day of leave is made up of a fraction of WTD leave, WTR leave and, if relevant, contractual leave (which he termed the “composite whole”.)  This limits an employer’s ability to argue that a series of deductions has been broken by a period of WTR leave properly paid, and opens an argument that every day of annual leave attracts enhanced WTD rights;
  1. It is well established that where pay fluctuates over the year, normal pay must be assessed by considering a sufficiently representative reference period. The Belfast Employment Tribunal found that this may vary from person to person within an organisation.  Where a worker works relatively standard overtime that rarely alters, an appropriate reference period may be 12 weeks.  However, for workers whose overtime peaks during a particular period, e.g. during July and August an appropriate representative reference period is likely to be 12 months;
  1. The Employment Tribunal also confirmed the position already established by the NI Court of Appeal, that voluntary overtime payments, provided the overtime is worked regularly, must be factored into the calculation of holiday pay.

The background:  Bear Scotland

In November 2014, the GB Employment Appeals Tribunal (EAT) delivered the landmark decision of Bear Scotland Ltd v Fulton in which it ruled that all regular overtime payments (and other supplemental payments linked to the performance of the role) should be included when calculating statutory holiday pay.

The Decision however only applied to holiday pay in respect of WTD annual leave (i.e. 20 days), therefore the 8 days of additional leave under the WTR does not have to include these amounts.

The EAT also found that an underpayment in respect of holiday pay which is separated from the next such underpayment by a period of more than 3 months, will be out of time for a claim to be brought.

The EAT did not deal with pure voluntary overtime i.e. overtime the employer is not obliged to offer and the worker is not obliged to accept. However, the Northern Ireland Court of Appeal addressed this point in 2015 and found voluntary overtime payments, provided the overtime is worked regularly, must be factored into the calculation of holiday pay.

In practice many employers have found it administratively preferable to include all overtime payments in the calculation of WTD holiday pay with the remaining 8 days being paid at basic rate.    The EAT Decision in Bear Scotland suggested (not binding) that the 8 additional WTR days are the last 8 days to be agreed upon by the employer and the worker in that year.  Some employers chose to specifically nominate the WTD days.

Understandably, employers were concerned about the potential for significant back. pay claims. However, in Bear Scotland the EAT found that workers could not claim any holiday underpayment that forms part of a series of deductions from wages (i.e. an unlawful deduction from wages claim) where more than 3 months has elapsed between the deductions. This could be a 3 month period where the worker took no holidays, or a 3 month period which includes holiday payments for WTR or contractual leave (but not WTD leave.)  Until the PSNI Decision this finding was relied on to severely restrict the scope of backdated claims as, in reality, the likelihood of a worker having a long series of untaken WTD holiday over a number of years that has not been separated by a further period of WTR leave, is minimal.

What does the PSNI Decision mean for employers?

Whilst this is only a Tribunal Decision and therefore not binding on other Tribunals, employees will undoubtedly attempt to rely on it going forward. We are also aware the case is being appealed to the NI Court of Appeal, but it is unlikely any ruling would be handed down before the latter half of next year.

This Decision expressly rejects most of the Bear Scotland findings that restrict a worker’s ability to bring retrospective claims based on them being out of time.  Therefore, prudent employers who have ongoing holiday/overtime claims should re-evaluate the strength of their defence, especially when relying on a gap in any series of underpayments.

Employers not including overtime 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.

However, 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. It may be that the Vice President was scathing on the PSNI attempts to rely on gaps of 3 months to avoid being liable for retrospective underpayments in circumstances where the policy (perhaps knowingly) of incorrectly calculating holiday pay persisted.  The Vice President seemed not to allow them to benefit from a ‘fortunate’ 3-month gap in the series. Therefore, 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.”

Even where you are including overtime payments in the calculation of holiday pay this decision may raise more questions than it answers.  The Employment Tribunal appears to have tried to apply a common-sense approach to what is undoubtedly a complex area of law.  However, the practicality of parts of the decision remain in doubt.  Whilst we continue to recommend employers specifically designate what days will be treated as WTD leave in each holiday year; whether this will circumvent the Tribunal’s “composite whole” approach to the pot of annual leave is an open question.