The EAT has ruled that the Working Time Directive gives rise to an entitlement to have voluntary overtime payments reflected in holiday pay provided that such payments represent "normal pay".
The question of whether such payments count as normal pay must be assessed on a case-by-case basis. In addition, the EAT ruled that the claimants in this case had a contractual entitlement to have voluntary overtime payments reflected in their holiday pay (Flowers v East of England Ambulance Trust).
Under Article 7 of the Working Time Directive (WTD), EU Member States must ensure that workers have the right to at least 4 weeks' paid annual leave. The WTD is implemented into UK law by the Working Time Regulations 1998 (WTR). The WTR provides workers with 5.6 weeks' annual leave, of which 4 weeks' is derived from the WTD. Workers are entitled to be paid at the rate of a "week's pay" for each week of leave, calculated in accordance with sections 221 to 224 of the Employment Rights Act 1996. For workers with normal working hours, a "week's pay" includes basic salary, but excludes payments for commission and overtime.
Although the WTD does not specify how statutory holiday pay should be calculated, European case law has indicated that the UK's approach to calculating holiday pay is insufficient. Importantly, in Williams and others v British Airways plc (Williams) the ECJ ruled that "workers must receive their normal remuneration for that period of rest". The ECJ expanded on the concept of "normal remuneration" to hold that a worker on holiday is entitled not only to basic salary, but also to any aspect of pay which is: "…linked intrinsically to the performance of the tasks which he is required to carry out under his contract of employment". This opened the door for workers with normal working hours to seek to include other components of pay in their holiday pay.
In November 2014, in the combined cases of Bear Scotland Ltd v Fulton and Baxter; Hertel (UK) Ltd v Wood and others; and Amex Group Ltd v Law and others (Bear Scotland), the UK Employment Appeal Tribunal (EAT) held that non-guaranteed but compulsory overtime payments should be reflected in holiday pay provided that it could be regarded as "normal remuneration". However, the EAT did not make any findings in relation to purely voluntary overtime, because the issue was not engaged in any of the cases in question.
Then in July 2017, the EAT was asked to rule on the question of including voluntary overtime payments. In Dudley Metropolitan Borough Council v Willetts (Dudley) the EAT held that the overarching principle was that normal - not necessarily contractual - remuneration must be paid during the 4 weeks' 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 said that: "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…are normally paid, they must be included in pay for holiday leave". The Judge said it would be for the fact-finding tribunal to determine whether the payments were sufficiently regular and settled as to amount to normal pay.
In this case, the question of voluntary overtime payments came before the EAT again, after an Employment Tribunal ruled that such payments should not be included in holiday pay.
The Claimants were employed in various roles concerned with the provision of ambulance services for the Respondent Trust. Clause 13.9 of the "Agenda for Change" NHS Terms and Conditions of the service (clause 13.9) provided that their holiday pay would include: "…regularly paid supplements, including any recruitment and retention premia, payments for work outside normal hours and high cost area supplements. Pay is calculated on the basis of what the individual would have received had he/she been at work. This would be based on the previous three months at work or any other reference period that may be locally agreed."
The Claimants brought claims alleging that their holiday pay had been underpaid and should have been calculated to reflect both non-guaranteed overtime payments and genuinely voluntary overtime payments. Their position was that they were entitled to have these payments included in their holiday pay by virtue of: (i) clause 13.9; and/or (ii) Article 7 of the WTD (the claim was brought under the WTD rather than the WTR because the Respondent Trust was an "emanation of the state", meaning that the Claimants were entitled to rely directly upon the WTD).
Employment Tribunal's decision
The Employment Tribunal found that the Claimants were entitled to have the non-guaranteed overtime payments included in their holiday pay by virtue of clause 13.9. In addition, the Respondent conceded that, following the EAT's decision in Bear Scotland, the WTD required non-guaranteed overtime payments to be reflected in holiday pay.
However, the Respondent resisted the claim in relation to the voluntary overtime payments. In the Employment Tribunal's view, the Claimants' were not entitled to have voluntary overtime payments included - either by virtue of clause 13.9 or the WTD - because the overtime was truly voluntary and there was no contractual obligation to perform it.
Following this decision, the EAT handed down its decision in Dudley. The Claimants appealed to the EAT.
Did the WTD require voluntary overtime to be included?
The Claimants argued that their case was indistinguishable from the decision in Dudley and, therefore, their claim should succeed. The EAT agreed, holding that it was "untenable" to argue that that an employee's agreement to carry out specified hours of voluntary overtime for reward gave rise to no contractual obligation. The EAT remitted the claims for a case-by-case assessment to determine whether the Claimants' patterns of voluntary overtime were sufficiently regular and settled to count as normal pay for holiday pay purposes.
Did clause 13.9 require voluntary overtime to be included?
The Claimants argued that, viewed as a whole, the purpose of clause 13.9 was to calculate holiday pay on the basis of what the employee would have been paid if they were at work and to base that calculation on a three-month reference period (or such other reference period agreed). Further, they argued that clause 13.9 had to be construed against the background of the WTD which required that holiday pay should correspond to normal pay.
The EAT was prepared to construe clause 13.9 in the Claimants' favour, noting that the objective intention of the clause was to maintain the overall level of pay which the employee would have received if working. Further, this construction accorded with the WTD and it made "…obvious sense for the contract to march in step with the WTD so far as possible". The EAT concluded that clause 13.9 required the inclusion of voluntary overtime and the calculation was to be based upon the three-month reference period provided for in the clause.
Private sector employers should pay heed to this decision despite the fact that it concerned the application of the WTD to an employer qualifying as an emanation of the state. This decision approved the EAT's decision in Dudley, which concerned a private sector employer. There, the EAT found that the WTR should be read to comply with the WTD and require the inclusion of voluntary overtime payments in holiday pay.
We are left with two binding decisions that voluntary overtime payments should be included in the calculation of holiday pay, provided such payments constitute normal pay. Unfortunately, neither decision offers any clear guidelines on how employers can determine what qualifies as payment as amounting to "normal pay". However, the EAT Judge in Dudley indicated that a payment once every four or five weeks would meet the threshold if paid over a sufficient period of time.
We understand that the Respondent has sought permission to appeal the decision to the Court of Appeal.