In a recent German case, the ECJ ruled that periods of short-time working – where the employee is employed but not working – can reduce a worker's annual leave entitlement below 4 weeks. However, the worker remains entitled to be paid "normal pay" for the leave they have accrued. 

The ECJ also made some comments about the proper inclusion of overtime payments in holiday pay which cast some doubt on whether truly voluntary overtime payments should be counted (Hein v Albert Holzkamm GmbH & Co KG).

Background

We know that the Working Time Directive (WTD) says that a worker is entitled to 4 weeks' paid annual leave. The pay they receive for that leave should be "normal pay" which means they should be put in a comparable position to periods of work. The rationale for this is that if a worker receive less than normal pay they may be discouraged from taking annual leave altogether.  The WTD provides that member states can gold plate these provisions and allow for collective agreements which "are more favourable to the protection of health and safety of workers".  

In this case, German law did gold-plate these provisions.  It gave workers 24 days' paid annual leave (compared to 20 days under the WTD).  Pay was calculated as follows:

• by reference to a 13-week reference period;
• overtime payments were expressly excluded; and
• any reduction in pay due to short-time working (i.e. still employed but not working) would not be reflected in the calculation of holiday pay.

In addition, in the German construction industry a special collective agreement was put in place which altered the default annual leave and pay entitlements under German law. First, workers subject to the agreement were entitled to 30 days' leave, rather than 24 days. This was set in stone and would not be reduced by any periods of short time working. Second, the calculation of holiday pay was different in ways which were both positive and negative for the worker. Pay was calculated as follows:

• 14.25% of gross wages received during a 52-week reference period;
• overtime payments were included; and
• pay was reduced where the worker had periods of short-time working during the reference period i.e. reduced pay for short-time working was taken into account.

Facts

The employee in this case, Mr Hein, was a German construction worker subject to the collective agreement.  He was on short-time working for 26 weeks of the relevant 52-week reference period.  

When he took annual leave which had accrued during the relevant reference period, the employer reflected the short-time working in the calculation of his holiday pay.  The result was that he was paid less than his normal hourly rate of pay.  Mr Hein brought a claim and the German court referred it to the ECJ.  

Decision

The ECJ's decision was primarily focused on the short time working issue.  However, it also briefly looked at the inclusion of overtime payments.  We report on both points below and consider the implications for the calculation of holiday pay.

On the short-time working point they said:

• The entitlement to paid annual leave only applied to periods of actual work.  As Mr Hein had not worked for 26 weeks the default position was that he was only entitled to half of the WTD annual leave allowance i.e. 2 weeks.  However, here, the collective agreement meant that he was entitled to 30 days' leave.  This was a measure favourable to workers.
• On pay, the short-time working provision in the collective agreement resulted in a significant reduction in the pay received for annual leave.  The consequence was that Mr Hein received pay which did not correspond to his "normal pay".  The increased entitlement to leave (i.e. 30 days) did not compensate for the negative effects of reducing the pay for leave.  This approach undermined the right to paid annual leave on conditions which are comparable to periods of work.

On the overtime point, the employer had argued that this was another benefit of the collective agreement which helped to compensate for the reduced pay for short-time working.  The ECJ said:

• Due to the exceptional and unforeseeable nature of overtime, pay for overtime does not in principle fall within "normal remuneration" for the purposes of paid annual leave under the WTD (paragraph 46 of the decision). 
• However:
  • where the obligations arising from the employment contract require the worker to work overtime;
  • on a broadly regular and predictable basis; and
  • the corresponding pay constitutes a significant element of the total remuneration that the worker receives. 

then overtime pay is part of normal pay and should be reflected in holiday pay  (paragraph 47 of the decision). 

They concluded that national courts must interpret national laws in conformity with the WTD.  This meant that holiday pay should not be less than normal pay.  However, they are not required to interpret national law to provide that overtime pay must be included unless the requirements of paragraph 47 were satisfied.

Does this decision mean that voluntary overtime payments should not be included in holiday pay?

How much should we read into paragraph 47 of the judgment and the reference to the inclusion of overtime only where there is a requirement to work it under the employment contract?  Does this mean that only compulsory, contractually-required overtime falls to be included and genuinely voluntary overtime is excluded?  

In British Airways Plc v Williams the ECJ ruled that "normal pay" covered any part of pay which was "linked intrinsically to the performance of the tasks which he is required to carry out under his contract of employment".  However, this arose in a case concerning various allowances payable to cabin crew, rather than voluntary overtime payments.

The issue of voluntary overtime has been considered in detail by the UK appellate courts on two occasions. In Dudley Metropolitan Borough Council v Willetts the EAT held that voluntary overtime should be included in holiday pay and expressly grappled with the contractual requirement point. They said the overarching principle was that normal - not contractual - remuneration must be paid during the annual leave guaranteed by the WTD.  In Williams the presence of an intrinsic link between the payments and the performance of tasks under the contract meant that they had to be treated as normal remuneration. However, the decision in Williams reflected the ECJ's assessment of the specific payments at issue in that case and was only one example of a decisive criterion of normal remuneration – it was not the only decisive criterion. The EAT Judge noted that: "The absence of such as intrinsic link does not automatically exclude such a payment from counting".  And later in the judgment: "The question in every case, irrespective of the label put on the payment, is whether the payment forms part of the worker's normal remuneration. If payments for voluntary shifts, standby or callout payments are normally paid, they must be included in pay for holiday leave"

However, the EAT Judge also said that if she was wrong on this and an intrinsic link was required, then that test would have been satisfied here because: 

• whenever a claimant was working a period of voluntary overtime they were performing tasks required of them under their contracts of employment (even if there was also a separate agreement); 
• the payments made were all directly linked to the tasks they were required to perform under their contracts; and 
• once a period of voluntary overtime had begun the claimants were in no different position to an employee working compulsory overtime.

More recently, in Flowers v East of England Ambulance Trust the EAT said it was "untenable" to argue that an employee's agreement to carry out specified hours of voluntary overtime for reward gave rise to no contractual obligation. Flowers is to be considered by the Court of Appeal by 31 October 2019.

Where does this leave employers?

Employers should be wary of interpreting this decision as meaning that they do not have to include voluntary overtime payments in holiday pay. The issue was not been given sufficiently detailed consideration by the ECJ in this case.  

The requirement for the overtime to be included only where there is a contractual requirement was rejected in Dudley as being specific to Williams. Instead, the focus should be on whether the payment is "normal".  However, even if that interpretation is wrong (which Hein suggests it could be) then there is still a good argument that voluntary overtime is, in any event, linked to the contract for the three reasons outlined in Dudley above.  This approach was endorsed by the EAT in Flowers.

Employers should continue to monitor developments in this area and look out for the Court of Appeal's decision in Flowers later this year.

Hein v Albert Holzkamm GmbH & Co KG