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Employment law update: Holiday pay should include voluntary overtime

Employment law update: Holiday pay should include voluntary overtime

In an important development in holiday pay case law, the Employment Appeal Tribunal (EAT) has ruled that voluntary overtime should qualify as normal remuneration for the purposes of calculating holiday pay.

In the case of Dudley Metropolitan Borough Council v Willetts (31 July 2017), the EAT dismissed the Council’s appeal that payments for voluntary overtime should not form part of a worker’s “normal remuneration” for calculating holiday pay under Regulation 13 of the Working Time Regulations 1998 (WTR). The Council argued that following the CJEU cases of British Airways v Williams and Lock v British Gas, voluntary overtime should not constitute “normal remuneration” because it lacks the “intrinsic link” to the performance of tasks required under the contract of employment. The EAT disagreed, stating that failing to include payments for voluntary overtime regularly worked would result in a risk of a worker suffering a financial disadvantage that might deter them from exercising rights under the WTR, and that voluntary overtime would come under the “umbrella contract” of employment since, without the contract of employment, an agreement for voluntary overtime would not exist.

What does this mean for employers?

Prior to Dudley, the following legal principles had already been established:

  • In accordance with the WTR, workers are entitled to be paid during statutory annual leave at a rate of “a week's pay” for each week of leave, calculated in accordance with the “week's pay” rules contained in the Employment Rights Act 1996 (ERA).
  • No matter the working pattern, a worker should receive holiday pay based on a “week's normal remuneration”.
  • “Normal remuneration” for the purposes of calculating holiday pay should include all payments received by workers that are intrinsically linked to the performance of their duties – this may include payments for shift allowances and premiums, standby-payments, on-call duties, guaranteed and non-guaranteed overtime and commission payments.
  • Principally, employees should never be discouraged from taking adequate rest breaks under the WTR by not receiving their “normal remuneration” for such holiday periods.
  • As such, where a worker regularly receives overtime payments, commissions or allowances, and such payments are “intrinsically linked to the performance of their duties”, they should fall within the scope of “normal remuneration” to be included in their statutory holiday payments.

 

How does this apply in practice?

  • For workers with fixed working hours and/or a fixed salary - holiday pay would be a week's normal remuneration.
  • For workers with no normal working hours / fluctuating hours and pay - holiday pay would still be a week's “normal remuneration” but the “week's pay” is usually calculated by working out the average pay received over the previous 12 weeks in which they were paid.
  • For shift workers - holiday pay is usually calculated by working out the average number of hours worked in the previous 12 weeks at their average hourly rate.

 

What’s changing?

  • Employers will now be expected to include voluntary overtime payments in their holiday pay calculations where such overtime constitutes “normal remuneration” that is intrinsically linked to workers’ performance of their duties - thus, a pattern of regularity is required to demonstrate “normal remuneration”.
  • Employers will therefore now need to assess whether overtime can properly be said to form part of workers’ “normal” pay. For example, has it been paid on a regular and/or recurring basis over a sufficient period of time? This will be a question of degree and fact for each individual worker.
  • Within Dudley, the EAT confirmed that overtime worked one week in every five was sufficient to constitute “normal pay”. In contrast, where voluntary overtime is exceptional or not usually paid, it will not fall in scope to be included in holiday pay calculations.
  • The rationale for the EAT’s decision is to prevent employers from setting artificially low levels of basic contracted hours and categorising any further working time as “voluntary overtime” which does not have to be accounted for when it comes to paid annual leave.

 

What employers should do next

  1. Assess the extent of voluntary overtime regularly worked within your organisation to understand your potential liability and the associated additional costs.
  2. Consider whether it would be more justifiable to increase headcount than continue with high levels of voluntary overtime.
  3. Adopt a system to assess employees’ voluntary overtime and any regular patterns that may be established which fall within scope of the current changes.
  4. Ensure regularly worked overtime is included within your holiday pay calculations by working out “normal pay” by reference to a reasonable reference period (e.g. 12 weeks).

 

For advice or training on how to calculate holiday pay, speak to our employment partner Claire Knowles on 029 2067 4404 or cknowles@acuitylegal.co.uk.

 

* PLEASE NOTE – in 2014 the Government passed the Deduction from Wages (Limitation) Regulations 2014 (SI 2014/3322) which limit the period within which workers can claim for back-dated unpaid holiday payments to two years. In addition, if there is a break of three months or more in a series of unlawful underpayments, a worker will be prevented from claiming for the period prior to such break.

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