COURT RULING | Holiday pay calculations must include voluntary overtime

Getting to grips with the rules surrounding annual leave and holiday pay can be a real headache for employers.

By law, workers are entitled to a week’s pay for each week of statutory leave that they take.

For employees who work fixed hours, this makes the situation relatively clear-cut: holiday pay amounts to their weekly normal remuneration. Things become a little trickier for employees whose hours vary from week to week. Here, “a week’s pay” is calculated based on the average pay the employee has earned in the past 12 weeks.

But where do overtime hours fit into all of this?

Well, fortunately for employers, a recent court case has provided some much-needed clarity on the matter. Here, a court was expected to determine whether voluntary overtime and overtime that is not guaranteed should be taken into account when calculating holiday pay.

Mr N Flowers and Others v East of England Ambulance Trust

In this case, multiple NHS employees brought a case against their employer, the East of England Ambulance Trust, arguing that their voluntary overtime should count towards their normal remuneration, and therefore be included in holiday pay.

The employees worked in a range of roles relating to the provision of ambulance services and worked variable levels of overtime, including:

  • Non-guaranteed or ‘over-run’ overtime, which was mandatory but irregular, relating to times when staff were required to continue working so as not to compromise patient care.
  • Voluntary overtime, which was also irregular and worked entirely at employees’ discretion.

Contractually, the employees’ terms of employment stated that regularly paid instalments, including payments for work outside of normal hours, would be included when calculating holiday pay during annual leave. The employees’ contracts also stated that pay would be calculated “on the basis of what the individual would have received had he/she been at work” and that “this would be based on the previous three months at work or any other reference period that may be locally agreed”.

Underpaid

On this basis, believing that they had not received the correct amount of holiday pay, employees brought a claim before an Employment Tribunal for unlawful deductions of wages. They put to the court that:

  • Under the Working Time Directive, the amount of holiday pay to which an individual is entitled must correspond to “normal”remuneration; and
  • This was also a contractual entitlement under the terms and conditions of their employment.

Outcome

When the case was originally brought in 2017, an Employment Tribunal held that the employees’ ‘over-run’ pay should be included in holiday pay calculations, but that voluntary overtime should not. However, the ambulance crew employees recently appealed this decision before the Court of Appeal – and won.

Delivering the judgment, Lord Justice Bean agreed with the employees’ prior assertions. He noted that there is no requirement that the hours of work taken into account when calculating holiday pay must be hours that are compulsory under the terms of an employee’s contract.

He therefore stated that voluntary overtime should be factored into holiday pay calculations if payment for such work is “sufficiently regular and settled” for it to amount to normal remuneration.

Whether overtime has been paid over a “sufficient period of time” would ultimately be up to a Tribunal to decide on a case-by-case basis.

James Tamm

Director of Legal Services

Expert Comment

For anyone who has followed the line of case law since holiday pay and overtime was first dealt with in the Bear Scotland v Fulton case a few years back, this decision is not a surprise. However, the decision is significant in that it is the first Court of Appeal case to explicitly state that voluntary overtime should be factored into the calculation of holiday pay provided it is part of normal remuneration.

Unfortunately, there is precious little guidance as to how frequently overtime has to be worked before it forms part of the calculation. If overtime is worked to a set pattern, even if that were one week out of four, that is likely to be sufficiently regular to count as normal, as is a situation where overtime is worked more often than not.

As ever, each case will turn on its facts, so it’s important to take specific advice from an Employment Law expert on your company’s particular circumstances.