The Court of Appeal has held that regular overtime should be included in the calculation of holiday pay.
In the case of Flowers and others v East of England Ambulance Trust, ambulance crews argued that their voluntary overtime should count towards their ‘normal’ remuneration, and therefore be included in holiday pay. The Employment Tribunal held that ambulance workers’ non-guaranteed overtime in respect of “shift overruns” should be included in the calculation of their holiday pay, but that on the facts of this case, purely voluntary overtime did not have to be included. They had brought unlawful deductions from wages claims in relation to how the Trust calculates their holiday pay.
The case went to the Employment Appeal Tribunal (EAT), which held that even voluntary overtime had to be included, by which time the Trust had conceded that it should pay for shift ‘overruns’ as these were not really voluntary, as they are essential to efficiency and patient safety. It was acknowledged that it is not open to any of the claimants to leave at the end of the shift if they are in the middle of an emergency call.
The Court of Appeal held that for a payment to count as “normal” remuneration, it must have been paid over a sufficient period of time. This will be a question of fact and degree. Items which are not usually paid, or are exceptional, do not count. Items that are usually paid, and regular across time, may do so. One decisive criterion or test for determining whether a particular component of pay is part of normal remuneration is where there is an “intrinsic link” between the payment, and the performance of tasks that the worker is required to carry out under their contract of employment. However, that is not the only decisive criterion or test. What matters is the overarching principle and its object. Applying these principles, the voluntary overtime worked by the claimants should have been considered in calculating their holiday pay.
Lord Justice Bean stated that voluntary overtime should be counted when calculating holiday pay if it is sufficiently regular and settled for payments made in respect of it to amount to normal remuneration.
“… There is no separate requirement that the hours of work are compulsory under the contract.”
This decision follows the decision of the EAT in Dudley Borough Council v Willetts in 2018, which held that the issue was whether payments for voluntary overtime fell within the Working Time Directive concept of “normal remuneration”. This recent case has gone one step further than the Dudley case, and now means voluntary overtime should be included in holiday pay calculations, even if it is irregular pattern, provided it has been regularly paid over a sufficient period of time.
The CA did not address the issue of how to distinguish between voluntary overtime which was ‘sufficiently regular and settled’, or broadly regular and predictable, which should be included and that which was ‘exceptional and unforeseeable’ which was not. This leaves open further challenges on the point, not least litigation on where the line is to be drawn before voluntary overtime should be included.
This case is not authority for the proposition that all voluntary overtime must now be included in the calculation of holiday pay. Notwithstanding this point, employers should now include regular overtime and regular commission payments in their holiday pay calculations, or run the risk of a successful “unlawful deduction from wages” claim against them.
What is “regular enough” is a question of fact in each case. So, if a person works overtime irregularly, for example, where there is no predictable pattern to it, or there are big gaps between the overtime working, then employers can still argue that it is not a regular payment which should be included in holiday pay. If you have employees whose overtime is not ‘regular’ but is ‘settled’, then you may need to review your approach.
The principle that people should not be worse off when they go on holiday is difficult to argue with, but for some employers it is a financially challenging issue, and the administration of it is far from simple.
Making a claim for unlawful deductions is not difficult, and has little risk to employees. It is possible to argue on the facts, and on the extent that back pay should be made, but defending such claims should be a last resort.
It is easy to say reduce your overtime working, but we recognise that this is easier said done, with skills shortages or high workloads, but it has to be the safest way of reducing such exposure. Making it more irregular may also help.
Introduce it to a Degree
The right to be paid for non-guaranteed overtime in holiday pay applies only to holiday pay for the four weeks’ minimum annual leave under EU law, not to the additional 1.6 weeks provided for by the Working Time Regulations. Employers need to decide their policy on how to treat the additional 1.6 weeks’ statutory minimum leave, and any additional contractual entitlement.
If you decide to include pay for overtime in all holiday pay to avoid complicating the administration of payments, you still have to decide whether this is just to contractual entitlements above 4 weeks, or to also pay the extra on bank holidays which may seem even more complicated.
The default position is that calculations should be based on the last 12 weeks’ pay. Many have payroll systems which make this an easy and inexpensive option. Other employers choose longer time frame to calculate average earnings, as the law permits this approach and may in future encourage it, rather than the default of the last 12 weeks default. The problem with this approach is that it may be more expensive than taking an average period of longer than the recent few weeks/months. We have clients who take a rolling 12-month average or last year’s P60 earnings or earnings over the holiday, financial or calendar year. This means that everyone can plan what holiday pay will be paid and avoids fluctuation, particularly if taking holiday after periods of working long hours.
Individual or Group?
The law would suggest that those individuals who fall into the regular overtime working category are different to people who are not quite ‘regular’. The first person may be entitled to average pay, the second possibly not. The legal result is that employers should, therefore, take an individual approach to see which employees’ voluntary overtime qualifies as normal pay, as the time sufficiency will vary from person to person. Many employers do not want to be having to make frequent decisions about whether a particular employee has become, or ceased to be, regular in their overtime working. In those circumstances, it may be easier to say” You will get average pay, if you are a production worker, engineer or whatever category/ department”.
Part-timers who work extra hours are not doing overtime in the traditional sense, but they should be paid an average payment.
It is well established in case law that commission and some regular bonus payments should be reflected in holiday pay. It is likely to carry over into regular stand-by and call-out payments.
Supreme Court Appeal?
The Ambulance Trust has applied for permission to appeal to the Supreme Court. We still do not know whether such permission will be given. Employers could hope and plan for this to happen. Such an approach would have the attraction of delay, and the chance that the judges in that Court might provide more clarity, especially over the issue of sustained but not regular overtime.
If the factoring in of yet more people into average holiday pay calculations is of a concern, talk to your Consultant then we may soon know whether a further decision is pending, and would be happy to discuss how it relates to your circumstances.
You are welcome to raise any concerns with our Consultant, who would be pleased to advise you on any element of the issues arising from this newsletter.