This article was written by Katherine Apps and is reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com or call 020 7542 6664.
Under section 221-224 of the Employment Rights Act 1996 (ERA 1996) the amount an employee receives in contractual holiday pay will depend on whether they have “normal working hours” or not under their contract. Under the Working Time Regulations 1998 (SI 1998/1833) (WTR) the rate of holiday pay is expressed as requiring the same as the calculation of a week’s pay under the ERA 1996. In Bamsey v Albon Engineering and Manufacturing plc  EWCA Civ 369, the Court of Appeal had held that the exclusion of voluntary overtime from a calculation of a week’s pay for the purposes of calculating both contractual and WTR holiday pay was lawful. Under this analysis, a zero hours employee could legitimately be paid nothing, if all of their hours were, essentially “voluntary”.
This was always a strained position. It began to approach breaking point once the CJEU began to explain the basis of the right to paid holiday under the Working Time Directive (2003/88/EC) (WTD). Although the Court of Appeal in Bamsey had held that their position was consistent with EU law, this conclusion looked increasingly likely to be doomed following the judgments in:
In Dudley Metropolitan Council v Willetts UKEAT/0334/16, Simler P confirmed its death knell. Under the WTD an employee could not be deprived of holiday pay calculated by reference to both their normal working hours pay plus their voluntary overtime in the reference period. She held that EU law requires that the amount of remuneration paid for a period of leave must correspond to what the employee received as “normal remuneration”. This does not depend on whether the employee has normal working hours or not. It is determined by what, from their perspective, their normal remuneration would be.
The overarching principle of the WTR and WTD is to ensure that workers do not suffer a financial disadvantage as a result of taking holiday. If a worker were to not to be paid for overtime, which they would otherwise have performed in a week in which they had booked holiday, this could discourage the worker from taking the holiday. Simler P confirmed that wholly exceptional payments would not “normally” be treated by the employee as part of their normal remuneration. But if there is an intrinsic link between the payment and the performance of tasks required under the contract then it must be included within normal remuneration. The absence of a link does not necessarily exclude a payment (for example, payments for seniority, length of service and so on would also be counted by a notionally objective employee as part of their normal remuneration) (paragraph 41). The WTD contains directly effective rights and the WTR had to be interpreted consistently with it so far as was possible.
Shortly before the judgement in Dudley, Employment Judge Laidler in Flowers v East of England Ambulance Trust ET3400310/2015 took the opposite view. However Simler P’s judgment in Dudley will now be binding on employment tribunals, and will have persuasive (but not binding) authority at EAT level.
Implications of Dudley
The implications of Dudley are potentially significant in some sectors, particularly those where contracts have historically been collectively negotiated. Many public services (large numbers of which are now privatised) are not fully staffed by those working regular contractual hours, but are kept afloat by those doing overtime or extra contractual hours. This is why, in some industries, industrial action in the form of an overtime ban can have such catastrophic consequences for service delivery. Until Dudley, most of these employees will have been paid annual leave at their basic rate but not additionally for the periods of overtime worked in the twelve weeks prior to their holiday. Those whose zero hours workforce are workers (they need not be employees) may well also need to change their HR systems significantly.
Employers whose payroll software calculates holiday pay by reference to basic pay and not overtime are essentially required, as a result of Dudley, to overhaul their systems. Employers, like the majority of law firms, who do not pay any supplement for overtime, will not need to change a thing.
Holiday pay and Brexit
What will happen to this area after Brexit is an interesting question. The draft of the European Union Withdrawal Bill 2017, would mean that:
It was assumed by many during the Brexit campaigns that no side was proposing that workers’ rights to paid holiday would be withdrawn. However, the European Union Withdrawal Bill, as currently drafted, provides potential mechanisms by which they could be significantly weakened. The constitutional principles relied on in Dudley to escape Bamsey could well have had less bite had either the original claim or the appeal arisen after exit day.