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Holiday pay: regular voluntary overtime should be included, says EAT

This was the outcome of the first binding EAT decision we have on the status of voluntary overtime in the context of calculating holiday pay. It is a significant development and is one which is likely to affect a broad range of employers who have so far adopted the stance that voluntary overtime can be ignored for holiday pay purposes.

The case in question was Dudley Metropolitan Borough Council v Willetts and Others. The case involved 56 council employees who worked as electricians, plumbers, roofers, storemen, operations officers, and quick response operatives. The employees were contracted to work 37 hours a week, and many also had a contractual right to work between two and four hours of overtime. In addition, they also performed additional duties on a voluntary basis, including out-of-hours standby shifts, attending call-outs, and voluntary overtime. The regularity of these shifts and when they were performed was decided entirely by the employees.

The employees argued that pay received for these voluntary overtime hours and duties should be taken into consideration for the calculation of holiday pay. The EAT agreed. It decided that where payments are made in relation to voluntary overtime and duties on a regular basis, over a sufficient period of time, they can qualify as “normal remuneration” and as such, it should be taken into account when calculating a worker’s holiday pay entitlement. The rationale for this (which is not new), was that workers should not be financially disadvantaged as a result of them taking holiday.

A couple of points to note from the decision are:

Workers are entitled to “normal remuneration”, not just contractual pay, during the four weeks’ annual leave provided for under the EU Directive.

Whether a payment qualifies as “normal remuneration” is a question of fact to be determined by a tribunal. A relevant factor will be if payments are regularly paid: exceptional and one-off payments will not normally qualify as “normal remuneration”.

Whilst not specifically tasked with addressing the question of reference periods, the EAT appeared to endorse the use of a 12 week reference period for calculating holiday pay.

Unfortunately the EAT did not offer much guidance about what level of regularity is required for payments relating to voluntary duties or overtime to qualify as “normal remuneration” and so a great deal of uncertainty around the issue remains. However, in the above case, the EAT decided that it was sufficiently regular for payments to be made at a rate of roughly 1 week in 5 over a period of years.

It remains to be seen whether the council will appeal the decision to the Court of Appeal but for the time being, where payments are made in relation to voluntary overtime or duties, employers need to consider whether holiday payments should be adjusted to take these into account.

If you would like to speak to a member of our employment team they can be contacted on 0113 220 6270.