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Holiday pay – time to review your payroll and accounting systems?

Holiday pay, in particular the question of which overtime payments should be included in the calculation, has troubled employers for some time.

The Court of Appeal has just delivered its long-awaited judgment on the case brought by a group of NHS employees in the case of Flowers & Others v East of England Ambulance Service NHS Trust.

The employees were all engaged in a number of roles relating to ambulance services. The Court of Appeal considered the distinction between two different types of overtime – voluntary overtime and non-guaranteed overtime.

  • Voluntary Overtime was the shifts which employees could be asked to work, if they wished, but they were completely free to choose whether or not they did so.
  • Non-Guaranteed Overtime, also referred to as “Shift Overrun Payments”, arose at the end of the shift where an employee might be in the middle of a task which they had to see through to the end (for example, caring for the patients who were awaiting an ambulance, or dealing with a call made to the emergency services). In those situations, the employee would have to stay until their task was completed, even if that ran beyond the end of their normal shift.

The Employment Appeal Tribunal decision

The employees brought their claim in two ways:-

  • Under the Working Time Directive (the European legislation covering annual leave, rather than the Working Time Regulations, which was the UK equivalent);
  • The NHS Terms and Conditions of Service (‘Agenda for Change’), in particular Section 13 – Annual leave and general public holidays.

The Employment Appeal Tribunal (EAT) considered the overarching principle for the right to paid annual leave, under the EU Working Time Directive, is that an employee should continue to receive their ‘normal remuneration’ during periods of leave. This means that payments they receive during annual leave should correspond to the pay they receive whilst they are working. Where a pattern of work, even if it is voluntary, extends for a sufficient period of time and is regular and/or reoccurring, it could become normal remuneration. If it does, it should be taken into account for the calculation of holiday pay. As for the terms of Agenda for Change, Section 13.9 is quite clear: “Pay is calculated on the basis of what the individual would have received had he/she been at work”.

The EAT therefore decided that employees were entitled to both voluntary and non-guaranteed overtime under both the Working Time Directive and Agenda for Change. The Trust appealed.

The Court of Appeal

The Court of Appeal reached the same conclusion as the EAT, that the employees had a contractual entitlement for voluntary overtime to be taken into account when calculating holiday pay, whether voluntary or non-guaranteed overtime, and in addition under the terms of the Working Time Directive, following quite a detailed analysis of the leading cases.

Although the EAT and the Court of Appeal upheld the claims on the same grounds, that may not be the end of the matter. The Court of Appeal spent some time considering a German case Hein –v- Albert Holzkamm (2018). In that case, the European Court of Justice (CJEU) noted the “exceptional and unforeseeable nature” of payment for overtime. Although that caused the Court of Appeal a little bit of head-scratching (they referred to this as a Delphic comment), it was decided that this wouldn’t impact on the outcome in this case. The potential confusion caused by that comment could be the basis of an appeal to the Supreme Court.

What happens next?

This will still be an expensive problem to solve, so whether or not there is an appeal, this is hardly likely to be the end of this matter.  The potential costs include ongoing and future payments and arrears of pay, as well as the potential costs to Trusts of dealing with grievances, Employment Tribunal and civil claims, and the logistical difficulties of reorganising payroll services to calculate and assess overtime with this new approach.

There are some limitations on the claims which employees can bring. Firstly, working time claims should normally be brought within three months of the date on which the payment fell due. Secondly, an unlawful deduction from wages claim should be brought within three months of the deduction, or the last of a series of deductions, and with no more than a break of three months between those deductions. Thirdly, claims brought in the Employment Tribunal are further limited to the period of no more than two years up to the date on which the complaint is made. This does not apply in the civil courts, and in a breach of contract claim an employee could look to recover up to 6 years’ arrears of pay.

Employers would be wise to review their payroll and accounting systems, and any clocking-in systems or timesheets they use, to see if both types of overtime can be properly recorded and taken into account. If you would like further advice on this, please get in touch.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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