August 10, 2017

Successful Overtime Appeal Sparks Big Changes to Holiday Pay

An Employment Appeal Tribunal (EAT) has held that pay for voluntary overtime that ‘extends for a sufficient period of time on a regular or recurring basis’ counts as a worker’s normal pay and must now be included in holiday pay calculations.

The case, Dudley Metropolitan Borough Council v Willets, it’s the first time an EAT has heard a case relating to voluntary overtime and the decision will have a big impact on employers.

What overtime is included and who might be affected?

The decision extends overtime to include voluntary overtime that is worked at certain times of the year, and overtime worked frequently throughout the year.

Voluntary overtime that is genuinely ad hoc (i.e. it is unusual or rare for the employee to work it) will not have to be included.

It’s worth noting that employers who have voluntary overtime arrangements in place will be affected by this EAT decision, as will employers using other practices such as out-of-hours standby, call-out and travel allowances.

Legal background to the overtime case

Under the Working Time Regulations (WTR), workers are entitled to 5.6 weeks’ statutory holiday each year, comprising:

  • 4 weeks’ EU entitlement (Euroleave) under the Working Time Directive (WTD); and
  • 1.6 weeks’ UK entitlement

This new decision applies to the 4 weeks’ holiday pay workers are entitled to under EU law only.

It does not apply to the additional 1.6 weeks’ holiday that workers receive under UK law or any contractual holiday a company gives on top of the minimum statutory amount.

Case law has already confirmed that the calculation of pay for the 4 weeks’ EU entitlement should include compulsory, guaranteed and non-guaranteed overtime, and commission payments which form part of a worker’s ‘normal remuneration’.

Normal premuneration should ensure that workers on holiday receive comparable pay to when they are working. This makes sure they are not financially disadvantaged and therefore deterred from taking holiday.

More guidance on the latest HR & employment law legislation

Case study: Dudley Metropolitan Borough Council v Willets and Others

In this case Mr Willets and other employees of Dudley Metropolitan Council (the claimants) are employed in different roles, including electricians, roofers, plumbers, to carry out repairs and improvements on the Council’s properties.

They all had set contractual hours (usually 37), and The claimants also completed call-out and out-of-hours work as part of voluntary overtime. This call-out and out-of-hours work was completely voluntary as the employees could ‘drop on and off the rotas to suit themselves’, and there was no right to enforce this work on the part of the employer.

Each claimant worked a different amount of voluntary overtime, and they believed their holiday pay should include this overtime and other associated payments (out-of-hours standby pay, call-out and travel allowances).

The Council had not taken this into account and had paid holiday pay at a basic rate.

The Claimants initiated Tribunal proceedings and the Employment Tribunal allowed the claim, finding that the voluntary overtime, call-out and out-of-hours payments and travel allowance should be included in the calculation of holiday pay.

The travel allowance was paid at a rate higher than that recognised by HMRC and calculated on the mileage undertaken, but there was no suggestion that it was designed to pay for the employee’s time, which was reimbursed separately.

Part of the payment was stated to be ‘clearly the equivalent of a train ticket, the taxed balance is not’. The EAT concluded that a ‘part of the allowance that is subject to tax as a benefit in kind is part of the claimant’s ‘normal’ pay. It is not designed to recompense for expenditure, and is subject to tax. It is always payable if mileage is undertaken in a private vehicle’.

The Respondent appealed but the EAT rejected the appeal, holding that in line with the Working Time Directive there is no distinction between contractual work and extra work that is voluntarily undertaken.

Therefore, voluntary and stand-by work should be included in holiday pay calculations so that the employee does not suffer detriment by taking holiday.

Six steps employers should take to account for voluntary overtime

Given that there is now a binding decision on this issue the following steps will need to be put in place by employers:

  1. Voluntary overtime that ‘extends for a sufficient period, or, time on a regular or recurring basis’ should be included in holiday pay calculations. Elements of pay which are not usually paid or which are exceptional do not count.

  2. The EAT said for a payment to count as ‘normal’ it must have been paid over a sufficient period of time, so the frequency and regularity of a payment would be relevant in deciding whether or not it is ‘normal’. As an example, in this case payments made over a period of years at a rate of approximately one week in four or one week in five were considered sufficiently regular.

  3. The EAT concluded that various voluntary payments (including call-out, out-of-hours standby and travel allowances) in this case were intrinsically linked to the performance of tasks under the contract of employment and should be included in holiday pay.

  4. Remember that this only applies to the first four weeks of annual leave under the Working Time Directive. The remaining 1.6 weeks that form the 5.6 weeks statutory holiday can be paid at basic pay.

  5. The EAT suggested that fluctuations in the amount paid from week to week can be accounted for in the process of averaging the holiday pay calculation over a 12-week reference period.

  6. Acting now to ensure that holiday pay is calculated correctly going forwards will help to reduce any past liability.

Managing the risk of claims

Although a significant decision, this change should not open the floodgates for claims for backdated holiday pay.

As the requirement to include voluntary overtime in holiday pay only relates to the four weeks (20 days) annual leave under the Working Time Directive, if there is more than a three month gap between the 20th day of leave and the first day of the new holiday leave being taken, the cycle in the series of deductions will be broken.

This means employees who have a break of more than three months between payments will not be able to argue they have suffered a series of unlawful deductions from wages.

And even if the cycle is not broken, Employment Tribunals can only look back two years from the date of the complaint, not the whole of their employment.

Employers may be at a higher risk of claims of underpayment of holiday pay in their current holiday year, and should seek support and guidance on calculating holiday pay.

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About the author

Louise Gillibrand

Louise is a generalist Human Resource professional with over 18 years’ experience across a variety of sectors including care, medical, retail and telecommunications, and is a member of the Chartered Institute of Personnel and Development. Louise provides sound practical and business-focused advice in line with employment legislation and best practice, and has worked in partnership with line managers, senior operational managers and directors. Typical consultancy projects include advice on complex employee relations issues, redundancy programmes, restructures, TUPE, recruitment, policy writing and grievance/disciplinary handling. In addition to her generalist knowledge she is experienced in delivering training on a wide variety of employment law and HR subjects. Louise joined the Moorepay consultancy team in October 2007.