The Court of Appeal has confirmed that the EU Working Time Directive (2003/88/EC) requires voluntary overtime to be included in holiday pay if it is sufficiently regular and settled to amount to normal remuneration. On the wording of their NHS contracts, the claimants were also entitled to have compulsory and voluntary overtime included in their holiday pay.
The case concerned a group of NHS employees who brought claims for unlawful deductions from their holiday pay.(1) Relying on both the EU Working Time Directive and their contractual entitlements, they alleged that their holiday pay should have taken into account two categories of overtime: 'non-guaranteed overtime' (a form of compulsory overtime where a task must be completed before the end of a shift) and voluntary overtime.
The Employment Appeal Tribunal (EAT) ruled that non-guaranteed and voluntary overtime should be included in the calculation of the claimants' holiday pay. The Court of Appeal has now rejected the NHS Trust's appeal.
The Court of Appeal agreed with the EAT's interpretation of the NHS contracts. The wording required both types of overtime to be considered when calculating holiday pay.
The court then looked at the EU Working Time Directive's requirements. EU case law has established that, in respect of the four-week period of annual leave granted under the EU Working Time Directive, 'normal remuneration' should be considered when calculating holiday pay. This is to ensure that individuals do not suffer a financial disadvantage for taking their holiday. The NHS Trust accepted that non-guaranteed overtime must be considered under the EU Working Time Directive, but disputed that this was also the case for voluntary overtime.
In the 2017 case Dudley MBC v Willetts, the EAT had concluded, in relation to voluntary overtime, that if there is a pattern of work which extends for a sufficient period of time on a regular and recurring basis to justify the description 'normal' then it should be considered when calculating holiday pay. The Court of Appeal agreed with this position. It ruled that voluntary overtime should be considered when calculating holiday pay if "the pattern of work is sufficiently regular and settled for payments made in respect of it to amount to normal remuneration".
This ruling is in line with other recent cases which have covered what should be considered when calculating holiday pay. It provides clear authority that employers should include sufficiently regular and settled voluntary overtime in their holiday pay calculations.
Employers could assess all overtime worked on an individual basis. However, for employers with large numbers of staff who work overtime, the exercise of assessing on an ongoing basis which of their workforce's overtime might fall outside these parameters could be costly and time consuming. So, employers may take the view that all overtime should be included, either for the workforce as a whole or for particular cohorts of staff.
Employers should consider the following points:
- The reference period for calculating holiday pay is increasing from 12 weeks to 52 weeks from 6 April 2020. This will help to reduce the impact of seasonal variations in overtime on an individual's holiday pay.
- The EU Working Time Directive can be enforced directly against state employers such as the NHS, so there is no need to consider the United Kingdom's own domestic legislation (the Working Time Regulations 1998), but the practical upshot is that the regulations will now be interpreted in line with this ruling. Although, importantly, the requirement to include overtime applies only to the four weeks' annual leave entitlement granted under the EU Working Time Directive. For holiday entitlement exceeding this four-week period – and provided that there is no contractual wording that grants further entitlements – employers need not follow this ruling.
- If employers choose to take two different approaches for calculating the EU Working Time Directive and additional holiday pay, contracts and relevant policies should make it clear that staff take their EU Working Time Directive holiday entitlement first each holiday year. However, it may be practically unworkable to have two different approaches.
- If facing an unlawful deduction from wages claims in respect of unpaid holiday pay, a two-year backstop period currently exists. The lawfulness of the backstop has been called into question and may be challenged in future litigation, but it currently limits employers' exposure to large holiday pay claims going back many years.
In this case, the wording of the NHS staff's terms and conditions clarified that holiday pay was calculated based on what they would have received if they had been at work. The EAT and the Court of Appeal thought that the natural interpretation was that overtime should be included in holiday pay. Care should be taken when drafting such clauses to ensure that contractual entitlements to overtime do not inadvertently exceed statutory entitlements.
(1) East of England Ambulance Service NHS Trust v Flowers judgment is available here.
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