Holiday pay update

Summary

Over the last few years the courts have increasingly ruled more types of payments ought to be included in holiday pay calculations. However, the prevailing view has been that only compulsory overtime need be included.

• a ruling over the summer has challenged this approach, with a new emphasis on ‘normal remuneration’ which should include regular/recurring elements of pay, and payments for voluntary additional work which is normally undertaken.
• this could affect NHS organisations when it comes to calculating holiday pay for staff who do regular voluntary overtime or on-call. They will need to reexamine their practices to ensure they are compliant with the latest ruling.

Legal background

Under the European Working Time Directive, EU member states must ensure workers have the right to at least four weeks’ paid annual leave. The directive does not specify how holiday pay should be calculated, but it has been interpreted as being based on “normal remuneration”.

In Williams and others v British Airways plc, the European Court of Justice held that “normal remuneration” includes not only basic salary, but also an employee’s remuneration which is “intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment. It was noted that the purpose of holiday pay is to ensure workers
are not disadvantaged by taking holiday compared to periods when they are working.

The directive is implemented in UK law by the Working Time Regulations, which grant workers an additional 1.6 weeks’ leave on top of the four weeks granted by the directive. Under the regulations, workers are entitled to a week’s pay for each week of leave, calculated in accordance with the Employment Rights Act 1996. The specifics of how to calculate a week’s pay has been the subject of evolving case law over the last decade or so.

The Willetts (Dudley Metropolitan Borough Council v Willetts and others UKEAT/0334/1) case is important because it’s the first time the question of whether to include voluntary overtime (where there is no obligation on either side) in holiday pay has been properly argued in the appeal courts – which means it creates a binding precedent.

The case

The claimants were council employees in posts such as electricians, plumbers and roofers. Each employee had set contractual hours of 37 per week. In addition to these normal working hours, once every four or five weeks, the employees were offered the following additional shifts, which they could choose to work on an entirely voluntary basis:

1. Out-of-hours standby shifts
2. Attending call-outs
3. Voluntary overtime.

Previous case law (the Williams case mentioned above and Lock v British Gas Trading Ltd) emphasised the need for a link between “normal remuneration” and the performance of tasks under a contract. In Willets, Dudley Council argued that payments for the additional shifts were not normal remuneration because they were not intrinsically linked to tasks performed under the employment contract.

The judgment

The EAT rejected the council’s position and found that pay for these voluntary shifts did amount to normal remuneration. The failure to include it in holiday pay calculations for the four weeks’ leave under the directive was unlawful. They found that an intrinsic link between the payment and the tasks performed under the contract was not essential and that in any event, in this case, the tasks were the same as those performed under their contracts, thereby showing a clear link.

The ruling also found that including those payments for voluntary shifts was essential to ensure that the employees were not deterred from exercising the core right under EU social law to take leave.

Unfortunately for employers, Willetts does not signal the end of uncertainty as far as holiday pay is concerned. Determining whether a payment qualifies as “normal remuneration” will be a  question of fact, to be determined on a case by case basis. The frequency and regularity of the payment will be relevant factors to take into consideration but Willetts provides little guidance on what is meant by “regular”; the overtime in that case was worked roughly once every four or five weeks, but it remains to be seen whether payments, say, every six months would be found to be “regular”.

The Willetts decision relates only to pay for the four weeks of annual leave afforded under the directive. It does not apply to the additional 1.6 weeks under the UK regulations or to any additional contractual holidays. That leaves the door open for employers to operate different systems for calculating holiday pay for the two types of leave, but whether that is a practical option remains to be seen.