August 7, 2017

Regular voluntary overtime payments must be included in holiday pay

The employment appeal tribunal (EAT) has confirmed that regular payments for voluntary overtime had to be taken into account in calculating holiday pay. 

The right to four weeks' paid holiday is one of the cornerstones of EU law. The concept is, on the face of it simple, but it has led to complex practical problems for employers to grapple with.  A series of UK holiday pay judgments in recent years have sought to clarify what the entitlement actually means in financial terms.

What happened in this case?

In this latest case, a group of 56 employees working in a number of different roles (such as electricians, plumbers and roofers) carrying out housing repairs for a council, claimed that they had not received the correct rate of statutory holiday pay. 

They each had set contractual hours (for almost all 37 hours per week) which were their normal working hours.  In addition, they volunteered to perform additional duties which their contracts did not require them to carry out.  This work was entirely voluntary overtime in the sense that the employees could "drop on and off the rotas to suit themselves whether day by day, week by week, month by month or permanently" and the council had no right to force the employee to do it.

The employees claimed that their holiday pay should reflect voluntary overtime, out-of-hours standby payments and call-out and mileage allowances.  Five lead claimants were selected to bring a claim for unlawful deduction of wages before an employment tribunal.

The employment tribunal concluded that the payments should be included in most of the claimants' statutory holiday pay for the four weeks' minimum paid annual leave required by EU law.  In reaching this conclusion, the employment tribunal relied on previous EU case law that has said that remuneration paid in respect of annual leave should be the "normal remuneration" received by the worker; and that this means that it must include any elements of pay which are "intrinsic to the performance of the tasks which the worker is required to carry out under his contract of employment".  The general principle behind this is that workers must not be put off taking leave because they will be at a financial disadvantage if they do.  The employment tribunal concluded in this case that the various payments were paid with sufficient regularity and in such a manner that they formed part of the employees' normal remuneration. 

The council appealed the decision to the EAT and asserted that voluntary overtime payments are not "normal remuneration" because they are not intrinsically linked to the performance of tasks required under the employment contract.  Instead voluntary overtime is carried out as part of a separate agreement between the employer and employee.

The EAT concluded that where there is an intrinsic link between the payment and the performance of tasks required under the employment contract (such as, flying allowances for a pilot), the payment needs to be taken into account in calculating holiday pay, but even if there is not a link, the payment may still need to be taken into account.  They agreed with the employment tribunal that the voluntary overtime and other related payments can form part of the employees' "normal remuneration" and be included in the calculation of holiday pay or the employees might be put off taking their holiday. Whether on the facts of any particular case voluntary overtime should be taken into account in the holiday pay calculation is a question of fact for the tribunal in each case, depending on whether the voluntary overtime has extended for a sufficient period of time on a regular and/or reoccurring basis to justify the description "normal".

In any event, the EAT considered that there would have been a sufficient link in this case because once the claimants started working a shift of voluntary overtime or a period of standby duty or call-out, they were performing tasks required of them under their employment contracts, even if there was a separate agreement or arrangement for the additional work.

What does this mean for employers?

This is an important, though not unexpected decision.  It is likely to be well publicised and employees will become aware that they will be entitled to be paid as if they were earning their usual pay, including voluntary overtime that is regularly paid when they take the first four weeks' annual leave required by EU law.  An employee could enforce this right to increased holiday pay by bringing a claim for unlawful deduction from wages, and so most employers who have to date held off from changing their holiday pay calculations because of the lack of a definitive decision on the treatment of voluntary overtime will now need to change their approach.

The UK has added an extra 1.6 weeks' minimum annual leave on top of this (i.e. 28 days for a full-time employee, which can include public and bank holidays), but the decision does not apply to this additional annual leave, nor any contractual holiday entitlement over and above that.  However, adopting a different approach to different portions of leave may well give employers practical difficulties. 

Employers should review their overtime and similar payments and consider whether they are paid with sufficient regularity so as to mean that they amount to normal remuneration and must be factored into holiday pay.  In deciding whether a payment needs to be included, it may be helpful to ask yourself what the worker would have earned if they had not taken holiday. Employers will need to determine criteria for when voluntary overtime is sufficiently regular to be factored in to calculations, and how to deal with practical payroll issues. Where they are unionised, employers may want to discuss this approach with their recognised unions. If employers change their practices they will also be keen to take steps to protect themselves against backward-looking claims, and the timing of introducing any such changes may (especially in the light of the removal of tribunal fees) be an important consideration.

Dudley Metropolitan Borough Council v Willetts and others UKEAT/0334/1

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