Voluntary Overtime and Holiday Pay

The Court of Appeal has now clarified that voluntary overtime should be taken into account by employers when calculating statutory holiday pay under the law of England and Wales – provided, however, that such overtime is sufficiently regular and settled that it amounts to "normal" remuneration.

Introduction

Over the past few years, various cases have clarified the correct basis for calculating holiday pay under the EU Working Time Directive – which the Working Time Regulations 1998 implement into UK domestic law – in respect of an individual’s statutory holiday entitlement. Holiday pay is not to be based just on the employee’s basic salary, but the individual’s “normal” remuneration.

As we reported in our previous update, it was established in AMEC Group Ltd v Law & Others and Hertel (UK) Limited v Wood & Others and Bear Scotland v Fulton & Baxter that this calculation of holiday pay should include an amount in respect of “non-guaranteed” overtime – that is, overtime which the employer is not contractually obliged to offer but which the worker must work if required to do so. The question now addressed by the Court of Appeal in the recent case of East of England Ambulance Trust v Flowers was whether that principle should extend to purely voluntary overtime.

Employment Tribunal and Employment Appeal Tribunal

In the East of England Ambulance Service case, a dispute arose with regard to the proper calculation of the holiday pay of ambulance crews. Their contracts provided for two types of overtime. "Non-guaranteed overtime" was compulsory but in practice only arose on an irregular basis. "Voluntary" overtime was, unsurprisingly, voluntary and also only arose on an irregular basis. The various members of the ambulance crews in question undertook varying amounts of overtime of both types.

The employment tribunal had held that non-guaranteed overtime should be included in the calculation of the employees’ holiday pay calculation but not voluntary overtime. The Employment Appeal Tribunal disagreed with that second conclusion and allowed an appeal. It considered that, regardless of the provisions of an employee’s contract, voluntary overtime could form "normal remuneration" but only if it was paid over a "sufficient period of time" on a regular and/or recurring basis.

Court of Appeal

At the Court of Appeal stage, the employer sought to argue that the EAT’s decision was inconsistent with the position under EU law. In the case of Hein v Albert Holzkamm GmbH the Court of Justice of the European Union (ECJ) had found that, because of its “exceptional and unforeseeable nature,” remuneration received for overtime does not, in principle, form part of the normal remuneration that the worker may claim in respect of the entitlement to paid annual leave.

Following extensive consideration of what the ECJ meant by that finding, the Court of Appeal concluded that the ECJ decision in effect drew a distinction between “exceptional and unforeseeable” overtime payments, which would not qualify as counting towards holiday pay, and “broadly regular and predictable” overtime payments which would. The Court of Appeal upheld the conclusion of the EAT to the effect that overtime which is sufficiently regular and settled that it amounts to "normal" remuneration should be included in holiday pay calculations.

Conclusions

While there may still be scope for arguing whether the East of England Ambulance Service decision is truly consistent with EU law given the decision in Hein, the Court of Appeal’s decision now represents the position under the law of England and Wales. It is also consistent with the general direction of travel of the case law over recent years expanding the scope of holiday pay to cover variable payments.

Nonetheless, it is important to appreciate that this decision does not mean that all voluntary overtime must be included in holiday pay calculations automatically. An assessment needs to be made of whether such voluntary overtime is "sufficiently regular and settled" to qualify for the purposes of calculating holiday by way of normal remuneration as distinct from being "exceptional." The EAT had made the point that whether voluntary overtime meets this requirement is a question of fact for the employment tribunal when it comes to a dispute. More immediately, this is an issue of assessment for the employer when seeking to ensure that the appropriate holiday pay payments are made. That voluntary overtime is, pending any further appeal, confirmed as potentially falling within the scope of the calculation of holiday pay increases the challenges for HR and payroll departments which will need to address how their record keeping, monitoring and payroll systems should be adjusted to allow for the assessment of individuals’ varied and varying voluntary overtime commitments and practices.