UK: Court of Appeal confirms that sufficiently regular voluntary overtime should be included in holiday pay calculation

The vexed issue of how to calculate statutory holiday pay (in respect of the 4 weeks' EU-derived statutory entitlement) has finally been considered by the Court of Appeal in Flowers v East of England Ambulance Trust. While much of the judgment concerns the correct interpretation of the contractual right to holiday pay (which was held to include voluntary overtime), the Court also considered the position under the Working Time Regulations (as construed to comply with the EU Working Time Directive) where the payment must be calculated to reflect "normal remuneration".  It upheld prior EAT authority that voluntary overtime should be included in the calculation provided it is sufficiently regular and predictable, notwithstanding apparently contradictory utterances from the ECJ.

Previous case law established that commission and certain supplementary payments had to be included in the calculation of "normal remuneration" because they were amounts for work which was "linked intrinsically to the performance of tasks which the worker is required to carry out under his contract of employment".  The EAT in Dudley Metropolitan Borough Council v Willetts then established that this did not mean that a payment would only be included if there was such an "intrinsic link"; rather it was just one way of establishing that the payment was "normal remuneration". Pay for voluntary overtime may also be "normal" if it extends for a sufficient period of time on a regular and/or recurring basis to have become part of the employee’s normal pay.  Even if an “intrinsic link” were required, the EAT ruled that the test would be satisfied: once an employee agreed to do the overtime, he was performing tasks required under his contract of employment and that contract was in effect an umbrella contract, sitting above the specific agreement to work the overtime.

This ruling was thrown into doubt by the comments of the European Court of Justice in Hein v Albert Holzkamm. The ECJ noted that "given its exceptional and unforeseeable nature, remuneration for overtime does not, in principle, form part of ..normal remuneration" and would only need to be included in the calculation of holiday pay where a worker’s contract requires them to work overtime "on a broadly regular and predictable basis and the corresponding pay constitutes a significant element of the total remuneration". Domestic legislation therefore would not need to be interpreted as giving the right that pay received for overtime work be taken into account unless these conditions were satisfied.

The Trust sought to argue that this pronouncement established that overtime does not have to be included in the calculation unless it is both compulsory and broadly regular and predictable.  The Court of Appeal rejected this interpretation, noting that the ECJ cannot have been contending that overtime is inevitably exceptional and unforeseeable, as this was clearly "nonsense".  It commented that the ECJ "is notorious for making pronouncements resembling those of the oracle at Delphi, but even by their oracular standards [this pronouncement] is hard to understand".  Accepting the Trust's interpretation would be contrary to the driving principle behind the requirement for "normal remuneration" of ensuring that there is no disincentive to workers taking annual leave, and would contradict earlier parts of the Hein judgment.  The Court also bore in mind the risk of unscrupulous employers using zero hours contracts and requiring 30 or 40 hours overtime, thereby avoiding the need to provide any paid holiday.  It therefore chose to interpret the ECJ's statement as simply drawing a distinction between exceptional and unforeseeable overtime payments on the one hand and broadly regular and predictable overtime payments on the other. The Court made no comment about the ECJ's statement that overtime pay would need to be a significant element of the total remuneration. Its clear view was that the EAT in Dudley was correct.