The Calculation of Holiday Pay

Voluntary Overtime and the Calculation of Holiday Pay
Following on from the 2014 decision of the Employment Appeal Tribunal (EAT) in Bear Scotland Limited and Others v Fulton and Others that payments for overtime which employees are required to work but which their employer is not obliged to offer them do count as 'normal remuneration' for the purposes of calculating a worker's statutory holiday pay entitlement for the four weeks' annual leave required under the EU Working Time Directive (WTD), the focus has shifted to whether or not payments for voluntary overtime should also be included in the calculation.

In 2017, the EAT ruled that where the pattern of work, though voluntary, extends for a sufficient period of time on a regular and/or recurring basis to justify the description 'normal', it is for the fact-finding tribunal to determine whether the work is sufficiently regular and settled for payments made in respect of it to amount to normal remuneration for the purposes of calculating holiday pay (Dudley Metropolitan Borough Council v Willetts and Others).

The question has now come before the Court of Appeal in a case that was heard by the Employment Tribunal (ET) before Dudley was decided (East of England Ambulance Service NHS Trust v Flowers and Others). The claimants were all employed by East of England Ambulance Service NHS Trust in a range of roles. They claimed that their holiday pay should include non-guaranteed overtime in the form of shift overrun payments, which arose when they were obliged to complete a task they had begun before the end of their shift which overran that time, and also payments for voluntary overtime shifts, which employees could choose to work if they wished. Their claims were brought pursuant to the terms of their employment contracts and, alternatively, under Article 7 of the WTD.

The ET held that the claimants' contractual terms and conditions entitled them to have their non-guaranteed overtime taken into account in the calculation of their holiday pay, but not their voluntary overtime. As regards the statutory claim under the WTD, this was conceded by the Trust in respect of non-guaranteed overtime but the ET agreed with its argument that voluntary overtime was in a different category in respect of this claim also.

On appeal, the EAT upheld the claimants' arguments in their entirety.

In dismissing the Trust's appeal against that ruling, the Court of Appeal found that the EAT's decision reflected a true interpretation of a collective agreement incorporated within the claimants' employment contracts. Whilst this decision meant that the NHS workers had succeeded in their claim, the Court went on to consider the position under the WTD, as this has implications for employees and employers throughout the workforce and clarity on the issue is much needed. The finding of the Court was that the Trust's obligation to take their workers' voluntary overtime payments into account also arose under the WTD.

The Court noted that it has been repeatedly emphasised in European legislation and case law that paid annual leave is a fundamental right. The Court of Justice of the European Union has frequently stated that there must be no financial disadvantage that would dissuade workers from taking such leave and that employers cannot satisfy obligations imposed by the WTD by paying the bare minimum under workers' contracts.

The exclusion of voluntary overtime from the calculation of holiday pay would also carry the risk of encouraging employers to reduce their holiday pay liabilities by setting artificially low levels of basic contractual hours and categorising any remaining working time as overtime. The prevalence of so-called zero hours contracts in the UK meant that such a risk was far from fanciful and provided a very real objection to the Trust's arguments.

Annual leave must, in principle, be determined in such a way as to correspond with the normal remuneration received by a worker, including any voluntary overtime payments or other supplements.

Holiday Pay for Term-Time Workers
Where workers are employed on permanent contracts but work only for part of the year, how should their holiday pay be calculated? The Court of Appeal addressed that burning issue in a test case concerning a school music teacher (The Harpur Trust v Brazel).

The part-time music teacher worked on a zero hours contract mostly during term time. Her contract entitled her to paid statutory leave of 5.6 weeks a year, remunerated on a pro-rata basis depending on the number of hours worked. This was paid three times a year at 12.07 per cent of the accrued hours at the end of each term. The percentage used was arrived at because 5.6 weeks is equivalent to 12.07 per cent of the working hours available in a year. The 5.6 weeks' holiday were not included in the calculation because a worker cannot accrue hours of work during that period. She argued that her holiday pay should be calculated according to the method set out in Section 224 of the Employment Rights Act 1996 (ERA), which is based on a person's average pay over the previous 12 weeks worked. Use of this method would result in a higher figure.

The school year varies, being between 32 and 35 weeks long. The charitable trust for which the woman worked argued that the calculation it had used was in accordance with guidance provided by the Advisory, Conciliation and Arbitration Service, and that to calculate the holiday pay of workers in her position in accordance with Section 224 ERA – i.e. based on average earnings over the 12-week period immediately before leave is taken and ignoring weeks outside term time – would unfairly reward those who work fewer weeks than the standard 46.4 weeks in a working year.

The ET found that the teacher had not been subjected to an unlawful deduction from wages, concluding that a principle of pro-rating was appropriate. The EAT disagreed. In its view, there is no requirement to carry out an exercise in pro-rating for part-time workers in order to ensure that full-time employees are not treated less favourably or to avoid a 'windfall' for term-time-only workers. The fact that the application of Section 224 ERA produces such anomalies could not justify the ET's conclusions. The purpose of the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 is to ensure that part-time workers are not treated less favourably than full-time workers. There is, as yet, no principle to the opposite effect.

In ruling on the trust's appeal against the EAT's ruling, the Court noted that the case raised an issue of general public importance on which there was no prior authority. It acknowledged that it might at first sight seem surprising that the holiday pay to which what the Court referred to as part-year workers are entitled represents a higher proportion of their annual earnings than in the case of full-year workers. That had the potential to produce odd results in extreme cases. For example, an exam invigilator who worked under a permanent contract, but only for one week a year, would in principle be entitled to 5.6 weeks of paid annual leave.

Dismissing the appeal, however, the Court found that there was no requirement of EU law to pro-rate the holiday pay entitlement of part-year workers to that of full-year workers. On any natural construction of the Working Time Regulations 1998, they made no provision for such pro-rating. While the method of calculating holiday pay contended for by the teacher might produce anomalies in some atypical cases, it had the advantage of simplicity and did not lead to unprincipled or obviously unfair results. Referring to the exam invigilator example, the Court noted that those who work for only a few weeks a year would normally expect to be engaged on a freelance basis, rather than having permanent contracts.