What constitutes “normal” remuneration for the purposes of calculating holiday pay, and should pay in respect of voluntary overtime be included?

This question can pose real problems for employers, particularly where individuals are performing different types of work. However, the EAT has recently passed down a helpful judgement, which provides some guidance.

In the case of Flowers v East England Ambulance Trust, the EAT held that if voluntary overtime is paid over a sufficient period, such that it can be regarded as “normal” remuneration, it should be taken into account when calculating an individual’s holiday pay.

Background

The Claimants were ambulance crew staff. They were required to work non-guaranteed overtime. This was where, at the end of a shift, they would be in the middle of performing a task which they had an obligation to see through to the end (for example, caring for a patient in their ambulance or responding to an emergency call).

They were also able to work voluntary overtime. This was a different category of work to non-guaranteed overtime. None of the Claimants were or had ever been required or expected to work voluntary overtime. They were and had always been free to choose whether or not to do so.

The Claimants’ contractual terms stated that their pay during annual leave would include “regularly paid supplements, including any recruitment and retention premia, payments for work outside normal hours and high cost area supplements”. This pay was to be calculated “on the basis of what the individual would have received had he/she been at work” according to a three month reference period or any other reference period agreed locally.

The relevant decisions

At first instance, the Tribunal held that non-guaranteed overtime should be taken into account when calculating holiday pay, whilst voluntary overtime should not. However, the EAT handed down an important judgment in Dudley Metropolitan Borough Council v Willetts [2018] ICR 31 subsequently, which clarified the position.

In Dudley, President Simler concluded that voluntary overtime should be taken into account when assessing holiday pay where it falls within the concept of “normal” remuneration. Amongst the propositions which she highlighted, she noted that:

1. “normal” remuneration must be maintained in respect of the period of annual leave guaranteed by Article 7 of the EU Working Time Directive (being at least 4 weeks). The purpose of this is to ensure that a worker does not suffer a financial disadvantage, thereby discouraging him/her from exercising his/her right to such leave;
2. for payments to count as “normal” remuneration, they must have been paid over a sufficient period of time. This is a question of fact and degree, in each case. Items which are not usually paid or are exceptional do not count. Items which are usually paid and regular may do so;
3. when assessing whether certain pay is part of “normal” remuneration, it will be important to identify whether or not there is an intrinsic link between the pay and the performance of tasks that the worker is required to carry out under the terms their contract of employment;
4. it is important to look at things in the round, and adhere to the overarching principle that workers should not be penalised for taking annual leave under the EU Working Time Directive.

President Simler held that where there is a pattern of voluntary work which extends for a sufficient period of time on a regular and/or recurring basis, it will be a question of fact as to whether or not it is sufficiently settled to be taken into consideration when calculating “normal” remuneration for holiday pay purposes.

Further, where a contract of employment provides for the possibility for voluntary overtime, once an agreed shift or voluntary overtime begins, the individual will be performing tasks required of him/her under his/her contract, such that they satisfy the “intrinsic link” criterion.

The EAT in Flowers applied these principles, concluding that the pay provisions in the Claimants’ contracts provided for the inclusion of “regularly paid supplements” within holiday pay. There was no good reason to construe references to “pay” in a way which would exclude overtime. In addition, the Claimants’ pay provisions ought to be read as a whole. It was clear that the intention of those provisions was to maintain the overall remuneration which the Claimants would have received had they been at work. This construction, in turn, corresponded with the principle set out in the EU Working Time Directive (that remuneration must be maintained). Accordingly, the EAT held that there was no proper basis upon which to construe the Claimants’ contracts so as to exclude voluntary overtime from the calculation of holiday pay.

Learning points for employers

So, what can clients take away from this judgement? There are a few things to bear in mind:

• If your contracts provide for the possibility of voluntary overtime, that voluntary overtime (once begun) is a task required of the individual performing it, by their contract of employment. This voluntary overtime will therefore satisfy the “intrinsic link” criterion mentioned above, such that it may need to be taken into consideration when calculating an individual’s holiday pay.
• Where there is a pattern of voluntary overtime which is sufficiently regular and settled, pay associated with it may amount to “normal” remuneration for holiday pay purposes—it is a question of fact and degree.
• The tribunals will give effect to the overarching principle in the Working Time Directive, to ensure that individuals are not being penalised financially for exercising their right to holiday.

Going forward

The calculation of holiday pay has been under a spotlight in recent years. Whilst each case turns on its facts, the basic principle is that pay in respect of the 4 weeks holiday to which an individual is entitled under the EU Working Time Directive must correspond to “normal” remuneration. What constitutes “normal” remuneration is debatable, but as noted in Dudley, “the essential point” is relatively simple. “Normal” remuneration is that which is “normally received”.

It is worth noting that the EU Working Time Directive is implemented in the UK by the Working Time Regulations, under which workers are entitled to more holiday at a national level than they are at a European level (minimum 5.6 weeks’ leave under the UK Working Time Regulations, as opposed to only 4 weeks’ leave under the EU Directive).

The idea that “normal” remuneration includes overtime (as set out in the EU Directive) does not apply to the additional 1.6 weeks’ holiday which workers are granted under the UK Working Time Regulations. Under UK legislation, holiday pay excludes overtime (other than guaranteed compulsory overtime). This has been held to be incompatible with EU law, but that is only in respect of the four weeks’ leave under the EU Directive.

With this in mind, disgruntled UK employees could seek to argue that employers ought to be complying with the spirit of the EU Directive to ensure that during all periods of holiday (not just their 4 week entitlement under EU law), “normal” remuneration is maintained.

There is also a question mark over what might happen to such legislation following the UK’s departure from the European Union. All existing EU legislation is due to be copied into domestic law as of the date we formally leave the Union, to assist with a “smooth” Brexit. How long existing EU law will remain in place thereafter is open to debate, and the UK Parliament has indicated that it might amend, repeal or improve EU law which has been adopted.

As alluded to above, the UK courts and tribunals have been grappling with a number of holiday pay cases recently, so it may be that the UK Working Time Regulations are open to review. As with all things Brexit-related: watch this space.

Further information

If you have any employment queries or questions about the issues raised in this blog, please contact a member of our employment team.