News - EAT hands down important judgment concerning the calculation of paid annual leave due under WTR 1998

Employment & Discrimination - Michael Ford QC, Mark Whitcombe

Dudley Metropolitan Borough Council v Mr G Willetts and Others (UKEAT/0334/16/JOJ), judgment handed down on 31st July 2017. To read the judgment in full, please click here.

Simler J, the President of the EAT, has handed down an important judgment concerning the calculation of paid annual leave due under the Working Time Regulations 1998 (“WTR”). In a major victory for workers nationwide, the EAT has held that entirely voluntary overtime falls within the scope of Article 7 of the Working Time Directive (“WTD”), and therefore within the concept of “normal remuneration” for the purposes of calculating the holiday pay due under regulation 13 of the WTR.

For ease of reference, the parties are referred to as “Claimants” and “Respondent”, as they were before the ET.

Factual Background

The Claimants are employed in a number of different roles as electricians, plumbers, roofers, storemen, operations officers and “Quick Response Operatives”, and are involved in the repair and improvement of the Respondent’s housing stock. They claimed that out-of-hours standby pay, call out allowance, voluntary overtime and mileage or travel allowance linked to the above should be taken into account in the calculation of holiday pay. The Respondent had not taken those payments into account when calculating holiday pay, which it had paid at basic rate.

The Claimants have set contractual hours and also volunteer to perform additional duties which their contracts of employment do not require them to carry out. The ET had found that on-call and additional overtime work was entirely voluntary in the sense that the employees could drop on and off the rotas to suit themselves, and additional work of that sort was “almost entirely at the whim of the employee, with no right to enforce work on the part of the employer”. The ET had nevertheless held that those payments should be included in the calculation of holiday pay.

The Employer’s Argument

On appeal to the EAT, the Respondent argued that the decisions of the CJEU in British Airways plc v Williams [2012] ICR 847 and Lock v British Gas Trading Ltd (C-539/12) [2014] ICR 813 made it clear that payments for such work should not count as “normal remuneration” for the purposes of the calculation of holiday pay under the WTD and WTR because they lacked the necessary intrinsic link to the performance of tasks required under the contract of employment.

The EAT’s Reasoning

The President began by noting that the right to paid annual leave had been regarded by the CJEU as a particularly important principle of EU social law, enshrined in Article 31(2) of the Charter. The recital to the WTD required account to be taken of the principles of the ILO Convention with regard to the organisation of working time. The relevant ILO Convention required that a worker should be paid at a rate that is “at least his normal or average remuneration”. There was also no doubt that payments in respect of overtime (whether compulsory, non-guaranteed or voluntary) constituted remuneration as a matter of domestic and EU law.

EU law required that normal (not contractual) remuneration must be maintained in respect of the 4 week period of annual leave guaranteed by Article 7. That overarching principle meant that payments should “correspond to the normal remuneration received by the worker” while working (Williams and Lock). The purpose of that requirement was to ensure that the worker suffered no financial disadvantage by taking leave, which was liable to deter him from exercising this important right, from which there can be no derogation. It followed that the CJEU in Williams did not purport to set a narrower test which would have the effect of restricting the application of the overarching principle. The CJEU had made it clear that the division of pay into separate elements cannot affect a worker’s right to receive “normal remuneration” in respect of annual leave. In each case the relevant element of pay must be assessed in light of the overarching principle and objective of Article 7, which is to maintain normal remuneration so that holiday pay corresponds to (and is not simply broadly comparable to) remuneration while working.

In order for a payment to count as “normal” it must have been paid over a sufficient period of time. That would be a question of fact and degree. Questions of frequency and regularity are likely to play a part in determining whether a payment is normal. Items which are not usually paid or which are exceptional do not count, but items which are usually paid and regular across time may do so.

Paragraph 24 of Williams should be read in that light and it simply reflected the CJEU’s assessment of the specific payments in issue in that case, as examined in light of the overarching principle. Paragraph 24 did not set out a sole or exclusive test of “normal remuneration” dependent on a link between pay and the performance of duties undertaken under compulsion of the contract of employment. If there was an intrinsic link between the payment and the performance of tasks required under the contract that is decisive of the requirement that it be included within normal remuneration. It is a decisive criterion but not the, or the only, decisive criterion. The absence of such an intrinsic link does not automatically exclude a payment from counting, as was shown by the fact that payments for seniority, length of service and professional qualifications also count for normal remuneration purposes even though they are not necessarily linked to the performance of tasks the worker is required to carry out under the contract of employment, or to inconvenient aspects of such tasks.

The President noted that the exclusion as a matter of principle of payments for voluntary work which is normally undertaken would amount to an excessively narrow interpretation of normal remuneration. It would give rise to the risk that employers would fragment pay into different components to minimise levels of holiday pay. Employers might set artificially low levels of basic contractual hours, categorising the remaining working time as “voluntary overtime” which did not have to be accounted for in respect of paid annual leave. That would result in a financial disadvantage which might deter the worker from exercising the right, contrary to the underlying objective of Article 7.

Alternatively, and even if there was a requirement for an intrinsic link between the payment and the performance of tasks which the worker was required to carry out under his contract of employment, the EAT found that that test was satisfied. Absent a contract of employment, a specific agreement or arrangement for voluntary overtime would not exist. The duties or tasks carried out in either case are the same. The contract of employment was in that sense an umbrella contract. Whatever the position in advance of a particular shift, once the Claimants commenced working a shift of voluntary overtime or a standby duty or callout, they were performing tasks required of them under their contracts of employment even if there was also a separate agreement or arrangement. The payments were all therefore directly linked to tasks they were required to perform under their contracts of employment, and once those shifts had begun they were in no different position from an employee who was required by his contract to work overtime, to be on standby, or to attend callouts.

Finally, the EAT did not accept the Respondent’s argument that where workers had the opportunity to take annual leave in weeks where the rota required no overtime/standby/callout shifts, that meant that they were not deterred from taking holiday. A deterrent effect was to be inferred from a reduction in remuneration rather than from actual evidence that a worker had not taken annual leave.

Comment

This is the first binding authority to consider after full argument whether truly voluntary overtime should be included in “normal remuneration” for the purposes of the calculation of paid annual leave under the WTD and WTR. Bear Scotland [2015] ICR 221 (EAT) left that question open, since the overtime considered in that appeal was “non-guaranteed”, in other words overtime which the employer was not obliged to offer, but which the employee was obliged to undertake if offered. The appeal to the EAT in Neal v Freightliner would have considered the point and was due to be heard along with the other appeals in Bear Scotland but settled shortly prior to the EAT hearing. The NICA considered the point in Patterson v Castlereagh BC [2015] NICA 47 and had held that voluntary overtime should be included in payments for reg 13 leave, but the point was conceded on appeal and the NICA’s decision was not reached after full argument.

The decision in Dudley MBC has particular importance in the modern UK labour market and has a significance going way beyond voluntary overtime. If the Respondent’s argument had succeeded, then the logical consequence would have been that workers on zero hours contracts had no “normal remuneration” at all, and therefore no entitlement to paid annual leave. The risk that employers might use devices such as minimum guaranteed hours (recognised by Simler J in the Dudley MBC judgment) is a real one, and is a tactic already adopted by several high street names. Dudley MBC defeats that tactic.

The employees were represented by Michael Ford QC and Mark Whitcombe, instructed by Laurence O’Neill of OH Parsons and Unite the Union.

Michael Ford QC and Mark Whitcombe also appeared in Bear Scotland, and were instructed in Neal v Freightliner prior to settlement.

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