Holiday Pay for voluntary overtime?

The controversial question of what to include in holiday pay has taken another turn against employers.

So what’s changed and what do you need to include in your calculations for holiday pay?

Commission…

Employers may have to change their payment arrangements for employees who earn a high proportion of their salary as commission, following a recent case.

In the case of Lock v British Gas, the courts held that failing to include commission in holiday pay calculations meant that employees earned significantly less for periods of holiday leave and hence were a disincentive to taking their statutory rest.

The case is currently the subject of an appeal, so the situation could alter again in this ever changing area of law.

Overtime…

Employers would be forgiven for misunderstanding the law on the different categories of overtime and what needs to be included in holiday pay. Here’s our handy guide to help you…

1. Guaranteed Overtime

‘Guaranteed Overtime’ refers to contracts which specify a fixed number of hours overtime which the employer offers over and above basic hours.

It is more common in manufacturing where, for example, additional weekend overtime hours are worked.

The overtime is clearly specified in the contract of employment. Guaranteed overtime has always been required by law to be included in holiday pay calculations since it represents ‘normal remuneration’.

2. Compulsory but Non-Guaranteed Overtime (Fulton v Bear Scotland)

Many employers will have a clause in their contracts of employment along the following lines:

“You may be required to work additional hours over and above your normal hours of work in order to meet business needs.”

Employers, in this case, are only going to offer overtime as and when it is needed.

There is no guarantee of a set number of hours. The strict terms of this type of contract mean that the overtime is compulsory. In other words, in circumstances where overtime is needed, the employee is ‘required’ to work it.

The recent case of Fulton v Bear Scotland means that where overtime is compulsory, employers may be faced with calculating holiday pay to take account of the average amount of overtime earned.

3. Non-Guaranteed and Non-Compulsory Overtime

To give employers a further headache, a recent decision of the Northern Ireland Court of Appeal (NICA) raises the same question about voluntary overtime.

In the case of Patterson v Castlereagh Borough Council, the original Tribunal hearing held that voluntary overtime should not be included in holiday pay calculations, which was welcome news for employers.

However, on appeal the NICA held that this was wrong. The NICA referred to European law which indicated that the concept of ‘normal remuneration’ refers to something which has existed over a certain period of time.

In other words, this indicates that even voluntary overtime might be considered to be part of normal remuneration if it is sufficiently regular.

However, the NICA has approached the matter with caution, stating that voluntary overtime is merely ‘capable’ of being included in calculations for holiday pay. Whether or not it should be in any given case will depend on the facts.

For that reason, the NICA has referred the matter back to the Industrial Tribunal to hear evidence of the overtime actually worked, what would be a suitable reference period to calculate entitlement and whether purely voluntary overtime should be included in holiday pay in accordance with the principles set out in earlier case law.

Employers should watch this case with interest.

Although decisions in the NICA are not binding in the courts or Tribunals in the rest of the UK, the principles are persuasive and it will be interesting to see how the Industrial Tribunal resolves this particular case, both for employers in Northern Ireland and employers in the rest of the UK.

Employers affected by any of the issues above should seek professional advice on how to deal with any claims and what steps to take to amend policies.

If you need help, you can book a consultation or take a look at our handy employer resources section.

By Tom Muirhead