Case update (3): Holiday pay and voluntary overtime

What do we already know?

We updated you in our August Newsflash Holiday pay and voluntary overtime on the EAT’s decision that payments for voluntary overtime that is normally worked must be included when calculating holiday pay for the first four weeks of holiday provided by EU law and the Working Time Regulations (Dudley Metropolitan Borough Council v Willetts and Others).

What’s new?

We promised in our above Newsflash that we would unpick the detail of the above case so here it is…

Summary:  Can voluntary overtime qualify as “normal remuneration” for the purposes of calculating holiday pay for the first four weeks of holiday provided by EU law?

Yes, and also payments for other voluntary elements of work too, says the EAT in Dudley Metropolitan Borough Council v Willetts available here.

Facts:  Five employees brought a Tribunal claim against their employer, Dudley Metropolitan Borough Council (the Council), on behalf of 56 other employees.

The employees had received holiday pay but argued that they had not received the correct rate of pay as their holiday pay did not include amounts in respect of voluntary overtime, voluntary standby allowances, voluntary call-out payments and travel allowances which they would have received had they been in work.

The employees all worked different shift patterns, and undertook different amounts of voluntary overtime and the frequency which they worked voluntary overtime also varied.

Tribunal decision

The Tribunal concluded that the majority of the additional elements, which were all in relation to voluntary work, should be included in the Claimant’s holiday pay the first for the four weeks of holiday provided by EU law. Specifically:

  • Voluntary out of hours standby payment/on-call rotas: The Tribunal concluded that the payments made over a number of years at a rate of one week in four, or one week in five, with occasional variation, fall within the Working Time Regulations and the case law definition of “normal pay”. Although the employees could choose to leave the rota arrangement, and in that sense their involvement remained voluntary, they received the pay consistently and regularly and to not pay the amount may deter them from taking their holiday entitlement. The Tribunal concluded that the payments should be averaged out on an individual basis (to accommodate some employees being on-call one week in four and other less);
  • Voluntary call out allowance: The Tribunal didn’t comment on how this should be calculated for holiday purposes but was satisfied that although this element of pay related to a voluntary rota, for those on the rota it was a normal part of their pay and holiday pay should reflect what is normally received, so it should be included in holiday pay calculations;
  • Voluntary travel allowance: In this case, the allowance went beyond mere reimbursement of expenses and the Tribunal found that the element of the allowance that was subject to tax as a benefit in kind was part of the employee’s normal pay and so should be included in holiday pay calculations; and
  • Voluntary overtime: The Tribunal found that some of the employees undertook regular voluntary overtime which should be included in holiday pay calculations (i.e. that overtime which is not occasional, unusual, rare or ancillary). However, other employees either did not undertake regular overtime or undertook voluntary overtime so infrequently it could not form part of their normal pay and so should not form part of holiday pay calculations.

By way of example, two employees worked regular Saturdays – one worked every Saturday and the other one worked most Saturdays, but not every week. Both these employees were considered to work this overtime sufficiently regularly for it to be considered part of “normal pay”. However, another employee only received overtime in major emergencies and on other odd occasions; as a result that pay was not considered normal pay.

The Tribunal went on to clarify that its decision only applied to the first four weeks of holiday leave (i.e. the statutory holiday entitlement provided for under the Working Time Regulations). The calculation of holiday pay in respect of any further leave would only need to include regular pay plus any element of agreed contractual overtime.

The employer appealed the Tribunal’s decision to the EAT.

EAT decision

The EAT upheld the Tribunal’s decision.

The EAT explained that as holiday pay must correspond with “normal remuneration”, any payments in respect of voluntary elements of work that are paid over a sufficient period of time on a regular basis fall within this definition.

The key points from the EAT’s decision are:

  • Workers are entitled to “normal remuneration”, not just contractual pay, during the four weeks’ annual leave provided for under EU law. The pay workers receive in respect of that annual leave must correspond with (and not be merely broadly comparable to) their “normal remuneration”;
  • While a payment which is intrinsically linked to the performance of tasks under the contract of employment (which had been the test applied in previous cases) will always be “normal remuneration”, the absence of such an intrinsic link does not automatically exclude a payment from counting as “normal remuneration”;
  • Even if its conclusion was wrong on this point, the EAT concluded that the various voluntary payments in this case (including voluntary overtime and voluntary standby payments) were intrinsically linked to the performance of tasks under the contract of employment in any event;
  • Determining whether a given payment qualifies as “normal remuneration” is a question of fact to be determined by a Tribunal. The frequency and regularity of the payment will be relevant factors for the Tribunal to consider – items which are not usually paid or which are exceptional will not qualify as “normal remuneration”, whereas items which are usually paid and regular across time may qualify as “normal remuneration”; and
  • Though it was not specifically asked to address the question of reference periods, the EAT also appeared to endorse the use of a 12 week reference period when calculating holiday pay.

Implications:  This is the first EAT decision on the status of voluntary overtime when calculating holiday pay. It is an important development and one which will affect those employers who have been holding the line that voluntary overtime need not be included in holiday pay calculations. The case concerned a range of voluntary payment types meaning that, as well as those businesses that operate voluntary overtime arrangements, any employers using other voluntary practices (such as standby and on-call arrangements) are likely to be affected.

However, the EAT offered little by way of further guidance on what level of regularity or frequency is required in order for a payment to qualify as “normal remuneration”. Therefore this is a question which employers and future Tribunals are left to grapple with and, therefore, a good deal of uncertainty remains. Hopefully the employer will appeal to the Court of Appeal and, if so, we’ll be sure to let you know.