Does pay for regular voluntary overtime need to be included in the calculation of holiday pay? Yes, says the Court of Appeal in a decision which confirms several prior Employment Appeal Tribunal (EAT) decisions that the entitlement to holiday pay under the Working Time Directive (WTD) must include pay for regular voluntary overtime. As we explain below, the outcome is more complex in practice as tribunals will now have to decide, on a case-by-case basis, whether a particular pattern of voluntary overtime is sufficiently regular and settled to fall within the category of regular voluntary overtime.
Under article 7 of the WTD, EU member states must ensure that workers have the right to at least four weeks’ paid annual leave. The WTD does not expressly specify how statutory holiday pay is to be calculated. However, it is well established that holiday pay should equate to ‘normal remuneration’. Normal remuneration has been interpreted to include not only basic salary but also remuneration which is intrinsically linked to the tasks the worker regularly performs.
The EAT held in Bear Scotland v. Fulton and others that compulsory non-guaranteed overtime (i.e., overtime that is compulsory for the employee if the employer requires it but which is not guaranteed to be provided) must be included in the calculation of holiday pay. The EAT also held, in Dudley Metropolitan Borough Council v. Willetts and others, that holiday pay should correspond to normal remuneration so that workers should not be discouraged from taking their annual leave entitlement; in other words, pay during holidays should not be below the rate a worker would expect to receive had they been working. For a payment to be treated as normal, it should have been made over a sufficient period of time on a regular or recurring basis.
The calculation of holiday pay has also been considered by the European Court of Justice (ECJ), which held in Hein v. Albert Holzkamm GmbH & Co. KG that remuneration received for overtime does not, in principle, form part of normal remuneration. However, where the employment contract requires the worker to work overtime on a broadly regular and predictable basis then that overtime should be included in the calculation of holiday pay.
East of England Ambulance Service NHS Trust v. Flowers
The Employment Tribunal (ET) was asked to consider the question of voluntary overtime in Flowers. Here, the claimants sometimes undertook both compulsory non-guaranteed and voluntary overtime for their employer. The ambulance service did not include any overtime in the claimants’ holiday pay. The claimants brought claims for breach of contract and breach of the WTD.
The ET held that, in line with Bear, the non-guaranteed compulsory overtime should be included in the calculation of the claimants’ holiday pay. However, it rejected the claims to include voluntary overtime.
The claimants appeal to the EAT was allowed, with the EAT finding that voluntary overtime could be included in the WTD holiday pay calculation. The case was referred back to the ET for an assessment of whether the thresholds identified in Willetts had been met.
Court of Appeal decision
The NHS subsequently appealed to the Court of Appeal. However, its appeal was dismissed. The court rejected the submission that the ECJ’s decision in Hein meant that voluntary overtime should be excluded from the holiday pay calculation as this would undermine the principle that an employee should not be deterred from taking annual leave. In its view, the ECJ had simply been drawing a distinction between overtime that was exceptional and unforeseeable as opposed to that which is broadly regular and predictable.
Impact on employers
This case will have important implications for both public and private sector employers. Tribunals will now be required to interpret the Working Time Regulations in line with this decision. The issue for employers now will be whether a particular worker’s voluntary overtime meets the threshold of regularity identified in Willetts so as to be included in the calculation of holiday pay. This creates a large grey area for employers as this decision provides little certainty on when payments made for voluntary overtime need to be included in the calculation of holiday pay. In the meantime the decision opens employers up to an increased risk of litigation resulting from wages claims based on underpayments of holiday pay going back up to two years. Employers will now need to carefully weigh up the costs and risks arising from this decision. The safest option for most employers may be to include all overtime payments in future holiday pay calculations. This approach may help to avoid any administrative, and potentially legal, costs of differentiating between employees’ overtime patterns. However, clearly any cost implications must be considered before proceeding down this route.