A recent decision of the Employment Appeal Tribunal has held that employees who regularly work voluntary overtime beyond their contracted hours may now have those payments taken into account in calculating holiday pay.

Article 7 of the Working Time Directive (2003/88/EC) (WTD) provides that workers have the right to at least four weeks’ paid annual leave.   This is implemented in the UK by Regulation 13 of the Working Time Regulations 1998 (WTR).  Over the past few years we have seen a number of cases considering what payments should be included in the calculation of holiday pay. These cases have held that an employer should look at what amounts to “normal remuneration”. This is remuneration which is “intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment”. As a result cases have considered that commission, compulsory overtime and certain allowances should all be included.  The question has remained as to how voluntary overtime should be treated.

In the latest case of Dudley Metropolitan Borough Council v Willetts (and others) the Employment Appeals Tribunal (EAT) upheld the decision of the Employment Tribunal and held that voluntary overtime worked for a sufficient period of time on a regular basis should be included in the first four weeks’ paid holiday. (For our blog post on the Employment Tribunal decision see Calculating holiday pay- should voluntary overtime be included?

A group of 56 employees employed by the Council claimed that they had not received the correct rate of statutory holiday pay. They worked a set number of hours per week which counted as their normal working hours. In addition, they volunteered to perform additional duties which their contracts of employment did not require them to carry out. They also participated in on-call rotas for which they were paid a standby allowance, plus call-out payments if they were called upon to do work while on call. Employees could drop on and off the rotas to suit themselves, and so the work was done “almost entirely at the whim of the employee”, with the Council having no right to force the employee to take on the additional work.  However, these voluntary payments were excluded from their holiday pay and the workers argued that this was contrary to the WTR.

The EAT upheld the earlier decision and drew on the previous ECJ decisions. It concluded that the overtime pay and allowances should be included in most of the claimants’ statutory holiday pay for the Regulation 13 leave. They were paid in such a manner, and with sufficient regularity, to be considered part of normal remuneration. Although they were not expressly included in the contract of employment, the specific agreement or arrangement for voluntary overtime would not exist in the absence of a contract of employment. Once the claimants commenced working a shift of voluntary overtime or a period of 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.

Further, the EAT pointed out that one of the principles of the WTD is that a worker should not be deterred from taking annual leave and any reduction in salary is presumed to act as a deterrent. To exclude voluntary overtime carried the risk that employers could set artificially low levels of basic hours and categorise the remaining working time as “voluntary overtime” that does not count for holiday pay purposes.

The case only concerns pay for the four weeks’ leave under regulation 13 of the WTR (which implements the WTD), not pay for the additional 1.6 weeks’ leave under regulation 13A, which is a purely UK measure, or additional contractual leave.

The case has been remitted back to the Tribunal to determine whether or not, on the facts for each individual case, the claimants are due outstanding holiday pay. The tribunal must consider the working pattern of each individual, what they normally did and when at work and what they would have earned if they did not take annual leave. Overtime which is rare or unusual will not count for these purposes, while overtime which is usual and regular may do so.

Employers should therefore take steps to review their overtime policies to consider whether payments are made with sufficient regularity to amount to normal remuneration and should therefore be factored into holiday pay. Employers will also need to consider how this should be dealt with in the payroll as a practical issue.  In terms of back dated claims, employers should note that an interval of more than three months between underpayments will “break the chain” of an unlawful series of deductions and prevent a claim by an employee for underpayment of holiday pay from reaching back prior to that break.

It seems that many employers up to now have adopted a “wait and see” approach to holiday pay. However, following this ruling and with a possible increased likelihood of claims following the abolition of employment tribunal fees, employers should address this issue sooner rather than later.

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