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Insights // 14 November 2017

Holiday Pay – Regular Voluntary Overtime Should be Included

Partner Sue Dowling, in our Employment Law team, examines a recent judgement on how paid annual leave ("holiday pay") should be calculated.

In the recent case of Dudley Metropolitan Borough Council v Willetts and others, the Employment Appeal Tribunal (“EAT”) handed down an important judgment concerning how paid annual leave should be calculated under the Working Time Regulations 1998 (“WTR”).

The EAT held that payments for regular voluntary overtime should be taken into account when calculating those workers’ holiday pay for the purposes of the four weeks’ minimum annual leave entitlement. During an employee’s four weeks annual leave under the Working Time Directive (“WTD”) they are entitled to receive “normal remuneration” which should take into account anything that fundamentally forms part of the work performed by the employee.

While this decision will be welcome news for workers, particularly those who regularly work voluntary paid overtime, it may well present an operational and financial burden for employers.

Background

The case was brought by 56 claimants who were employed by Dudley Metropolitan Borough Council (“the Council”) as tradesman responsible for the repair and maintenance of council houses. The claimants had set contractual hours of 37 hours per week; however they would also work additional voluntary overtime, including volunteering to be placed on standby and call out for out-of-hours emergency work. While the claimants were paid for their voluntary overtime worked, together with a mileage allowance, their holiday pay was calculated purely on the basis of their contractual hours alone.

The claimants argued that their out-of-hours standby pay, call out allowance, voluntary overtime and mileage allowance should be taken in account and that the current calculation of their holiday pay was contrary to the WTR. They were successful at the employment tribunal.

The Council subsequently appealed the judgment on that basis that previous decisions made by the Court of Justice of the European Union, namely in British Airways plc v Williams [2012] and Lock v British Gas Trading Ltd [2014], had established that such payments should not be counted as “normal remuneration” for the purposes of calculating holiday pay. The European case law determined that there was a need for an ‘intrinsic link’ to the performance of tasks required under the employment contract. On this basis, the Council argued that the necessary link was missing because voluntary overtime was not required under the claimant’s contracts of employment.

Employment appeal tribunal decision

The EAT recognised the important principle of the right to paid annual leave, and determined that there was no doubt that payments in respect of overtime, whether voluntary or otherwise, constituted remuneration as a matter of both EU and domestic law. The EAT reaffirmed that the purpose of paid annual leave is to ensure that workers suffer no financial disadvantage from taking leave, which may otherwise deter workers from taking said leave.

The EAT rejected the Council’s argument and found they had relied too heavily on what was required by the contracts of employment. The EAT concluded that the WTD draws no particular distinction between work that is required under a contract of employment, and work that is done “as a consequence of volunteering”, and confirmed, as a matter of principle, that where a pattern of voluntary work extends for a sufficient period of time on a frequent, and recurring, basis to justify the definition of “normal” for the purposes of “normal remuneration”, then these voluntary overtime payments must be included in holiday pay calculations.

Comment

It is important for employers to note that the EAT cautioned that their decision should not open the floodgates for all payments to be treated in this way, advising that not all overtime will be included, and that payments should only be considered as “normal remuneration” provided they have been paid for a sufficient period of time, thereby reaffirming the requirement of frequency and regularity.

Whether a payment will be sufficiently regular, for the purposes of determining whether it should be considered as “normal remuneration”, will ultimately depend on the circumstances and facts of each particular case. The EAT was clear that purely ad hoc or irregular overtime does not give rise to inclusion within holiday pay for calculation purposes.

It will be prudent for employers to take steps now to review their overtime arrangements. In particular, employers should look at any current overtime payments being made and the regularity of those payments in order to determine whether they are sufficient regular to require inclusion in holiday pay.

For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800. 

This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.

Sue Dowling

Sue Dowling

Partner, Employment Law & Venue Licensing

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