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Court of Appeal rules on holiday pay and voluntary overtime

  • United Kingdom
  • Employment law

10-06-2019

Over the years, case law has extensively addressed the basis of holiday pay calculation under the Working Time Directive, leading the EU court of Justice (CJEU) to identify several overarching principles, such as the need to ensure workers are properly compensated during periods of leave and, what is more, are not deterred from taking holiday. Despite this, one issue recognised by the UK courts as something of an anomaly and one which has remained unresolved conclusively, is the extent to which voluntary overtime might need to be included in calculations of holiday pay.

Today, in the case of Flowers v East of England Ambulance Trust, the Court of Appeal has concluded that voluntary overtime is likely to form part of “normal pay” and to be relevant to the calculation of holiday pay in many cases unless it is exceptional.

Background: previous case law on voluntary overtime

In 2017, the Employment Appeal Tribunal (EAT) ruled in Dudley MBC v Willetts that the UK’s Working Time Regulations require payments made for voluntary overtime which is normally worked to be included when calculating holiday pay for the first four weeks of holiday. The EAT drew a distinction between overtime that is normally worked and paid, and overtime which is exceptional or which is usually unpaid. The key question is whether overtime can properly be said to form part of an individual’s “normal pay”. For a payment to count as “normal” it must have been paid on a regular and/or recurring basis over a sufficient period of time. This will be a question of fact and degree in each case.

Willetts was followed and applied in 2018 by the EAT decision in the current case of Flowers v East of England Ambulance Trust. The Flowers case concerns two forms of overtime: non-guaranteed overtime paid to an employee who is in the middle of a task at the end of his/her shift and must stay to complete it (also referred to as a shift overrun payment); and, voluntary overtime paid to an employee who volunteers to work extra shifts. The Tribunal concluded that the former was a contractual obligation and should be taken into account in the calculation of holiday pay, whereas the latter fell outside holiday pay as it was voluntary and not a contractual requirement.

Overturning the latter aspect of that judgment, the EAT rejected the contention that voluntary overtime that was not contractual should necessarily be excluded. The EAT found that whether voluntary overtime falls within normal pay will depend upon the established principles of regularity, etc. In the Flowers case, it found in the claimants’ favour that both the terms and conditions of employment under which the ambulance workers were engaged (which were silent as to the working of voluntary overtime but specified that holiday pay should include, “regularly paid supplements including payments for work outside normal hours”) and the Working Time Directive, required voluntary overtime pay to be included in the calculation of holiday pay.

However, in the intervening period since the lodging of an appeal of the Flowers EAT decision, the CJEU made observations in a German case of Hein v Albert Holzkamm GmbH & Co, which appeared to cast doubt on the support Willetts and Flowers give to a general proposition in favour of including voluntary overtime in holiday pay calculations. The CJEU’s judgment suggested that employers might not have to factor pay for overtime into holiday pay calculations unless the worker is contractually obliged to work overtime.

The Court of Appeal’s decision today

In today’s judgment, the Court of Appeal has upheld in principle the findings of the EAT in Flowers, concluding that despite the absence of a contractual obligation to work voluntary overtime, the claimants have a contractual entitlement to have voluntary overtime they do work taken into account for the purposes of calculating holiday pay. As such, the court found there is no basis for distinguishing voluntary overtime payments from those which are non-guaranteed (the latter being accepted as included in holiday pay calculation).

The Court of Appeal also went onto consider the interpretation of the Working Time Directive. With reference to the Hein decision, although the court found the CJEU’s reference to a contractual requirement both surprising and self-contradictory, it concluded that it cannot have been the intention of the CJEU to “perform a handbrake turn” on preceding case law. Accordingly, the Court of Appeal concluded that, by referring to a contractual requirement, the CJEU was merely seeking to draw a distinction between “exceptional and unforeseeable overtime payments” on the one hand and “broadly regular and predictable ones” on the other (the former of which would not properly be included amongst normal pay, but the latter of which would).

Although, in light of today’s decision it seems highly likely that a further appeal is in the offing, the Court of Appeal has declined to refer the question over comments in Hein back to the CJEU. This is because they had already found the claimants had won their case on the basis of their contractual terms. However, the court also had in mind the advent of Brexit and whether a referral to the CJEU would precede Brexit and any future loss of jurisdiction of the CJEU over such matters. As a result, unless the Supreme Court were to refer the case to the CJEU in due course, any appeal is likely to fall to it.

Comment

Despite the now consistent approach by the UK courts in Willetts and now Flowers, the significance of this decision suggests that today’s judgment is unlikely to be the final word. The uncertainty generated by CJEU comments in Hein also remains, albeit there is obvious logic to the Court of Appeal’s side-stepping of its reference to a contractual requirement.

Employers would be well advised to take specialist advice before making changes to the way holiday pay is calculated or compromising actual or potential back pay claims for voluntary overtime. However, if today’s decision is finally approved in due course, the financial liability many employers face in unpaid holiday pay could be sizeable. In that regard it is particularly worth noting that the issue of backdated payments is itself still hotly contested in the courts.

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