Voluntary overtime must be included in holiday pay if sufficiently regular and settled

Background

The case concerned a group of NHS employees who brought claims for unlawful deductions from their holiday pay. Relying on both the WTD 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 CA has now rejected the NHS Trust employer’s appeal

Court of Appeal’s decision

The CA agreed with the EAT’s interpretation of the NHS contracts. The wording required both types of overtime to be taken into account when calculating holiday pay.

The CA went on to look at the requirements of the WTD. EU case law has established that, in respect of the four-week period of annual leave granted under the WTD, “normal remuneration” should be taken into account 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 needed to be taken into account under the WTD, but disputed that this was also the case for voluntary overtime.

In the 2017 case of 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/or recurring basis to justify the description “normal” then it should be taken into account when calculating holiday pay. The CA agreed with this position. It ruled that voluntary overtime should be taken into account 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”.

Practical implications

This ruling is in line with other recent cases covering what should be taken into account 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. In reality, 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 bear in mind 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 reduce the impact of seasonal variations in overtime on an individual’s holiday pay.
• The WTD can be enforced directly against state employers such as the NHS, so there was no need to consider the UK’s own domestic legislation (the Working Time Regulations 1998), but the practical upshot is the Regulations will now be interpreted in line with this ruling. Importantly, though, the requirement to include overtime only applies to the four weeks’ annual leave entitlement granted under the WTD. For holiday entitlement exceeding this four-week period  - and provided there is no contractual wording that grants further entitlements - employers do not need to follow this ruling.
• If employers choose to take two different approaches for calculating WTD and additional holiday pay, we recommend contracts and relevant policies make clear that staff take their WTD holiday entitlement first each holiday year. It may, however, be practically unworkable to have two different approaches.
• If facing an unlawful deduction from wages claim 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 made clear that holiday pay was calculated on the basis of what they would have received if they had been at work. The EAT and the CA 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.

East of England Ambulance Service NHS Trust v Flowers and others – judgment available here.