Holiday pay: Court of Appeal rules that voluntary overtime payments should be reflected in holiday pay
The Court of Appeal has upheld an EAT decision 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. In addition, the claimants in this case had a contractual entitlement to have voluntary overtime payments reflected in their holiday pay (East of England Ambulance Service NHS Trust v Flowers and ors).
Under Article 7 of the Working Time Directive (WTD), EU Member States must ensure that workers have the right to 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". This meant 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 ruling 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 it could be regarded as "normal remuneration". However, the EAT did not make any findings in relation to purely voluntary overtime since the issue was not engaged.
In July 2017, the EAT was finally asked to rule on the question of including voluntary overtime payments. In Dudley Metropolitan Borough Council v Willetts (Willetts) 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. 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".
In April 2018 the issue of voluntary overtime payments came before the EAT again in the case of Flowers v East of England Ambulance Service NHS Trust (Flowers). The EAT agreed with the decision in Willetts and held that the WTD gives rise to an entitlement to have voluntary overtime payments reflected in holiday pay provided that such payments represent normal remuneration.
Although the direction of travel was all one way, the employer in Flowers appealed to the Court of Appeal and we report on its decision below. However, before the Court of Appeal hearing took place, the ECJ issued a decision which appeared to be at odds with its previous approach. In Hein v Albert Holzkamm GmbH & Co KG (Hein) – a case concerned mainly with the impact of short time working on annual leave - the ECJ made comments about the inclusion of overtime payments in holiday pay which cast doubt on whether voluntary overtime payments should be counted.
The Claimants were employed in various roles concerned with the provision of ambulance services for the Respondent Trust (the 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 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 Trust was an "emanation of the state", meaning that the Claimants were entitled to rely directly upon the WTD).
Decisions of the Employment Tribunal and EAT
The Employment Tribunal decided that the Claimants' were not entitled to have voluntary overtime payments included in their holiday pay - 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 the Tribunal's decision, the EAT handed down its decision in Willetts. The Claimants appealed to the EAT.
The EAT concluded that: (i) Clause 13.9 required the inclusion of voluntary overtime in holiday pay; and (ii) following Willetts, the WTD required such payments to be included in holiday pay. 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. 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.
The Trust appealed to the Court of Appeal.
Decision of the Court of Appeal
The Court had no trouble in deciding that Clause 13.9 required voluntary overtime payments to be included in holiday pay. However, the Court went on to consider the position under the WTD given the implications for the wider non-NHS workforce and because "employers need to know whether the decision in Willetts was correct".
The Trust argued that Williams and the subsequent ECJ decision in Lock v British Gas Trading only provided for the inclusion of payment for tasks which a worker is required to carry under their contract. This meant that voluntary overtime payments were out of scope because there was no contractual requirement to undertake such work – the worker was free to take it or leave it. However, the Court rejected the Trust's arguments, agreeing with the EAT in Willetts that the relevant question is whether the work in question is sufficiently regular and settled for the associated payments to amount to "normal" pay.
The Court also went on to consider the impact of the decision in Hein. In Hein, the ECJ had said that pay for overtime does not necessarily amount to normal pay due to its exceptional and unforeseeable nature. Instead, overtime pay will be normal pay only where the employment contract requires 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.
The Trust argued this meant overtime payments should only be included where there was a contractual requirement to perform the overtime and it was broadly regular and predictable. However, the Court disagreed on the basis that this approach would directly contradict the ECJ position in Williams and they did not believe the ECJ had "intended to perform a handbrake turn…and contradict so much of what they had previously said". Instead, the Court preferred the view that the ECJ was attempting to distinguish between pay for exceptional overtime (which would be out) and pay for regular overtime (which would be in). There were also policy reasons for rejecting the Trust's interpretation: the exclusion of voluntary overtime would encourage unscrupulous employers to set low contractual hours and categorise other hours as overtime in order to reduce holiday pay.
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 approves the EAT's decision in Willetts, 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.
Both Willetts and Flowers are binding authorities for the principle that voluntary overtime payments should now be included in the calculation of holiday pay, provided such payments constitute normal pay. Unfortunately, neither decision offers clear practical guidelines on how employers can determine when overtime is regular enough to qualify as "normal pay" – although the EAT in Willetts indicated that a payment once every four or five weeks would meet the threshold if paid over a sufficient period.
It is not yet known whether the Trust will apply for permission to appeal to the Supreme Court. Accordingly, employers who have not yet adjusted holiday pay to include relevant voluntary overtime payments may wish to wait and see whether this case progresses further.