Holiday pay – regular voluntary overtime should be included says EAT

Following Dudley Metropolitan Borough Council v Willetts and others it is now time for employers to review their holiday pay practices in relation to holiday pay. The previous situation (we reported in 2014) was that only compulsory or guaranteed overtime payments should be included in holiday pay calculations. In 2015 a Northern Irish tribunal ruled that voluntary overtime should be included, and whilst this was perhaps the writing on the wall, tribunal decisions are not binding, so we had to wait for the first Employment Appeal Tribunal ruling, which we’ve now had. Our full article contains a briefing on what employers should do next.

Following Dudley Metropolitan Borough Council v Willetts and others it is now time for employers to review their holiday pay practices in relation to holiday pay. The previous situation (we reported in 2014) was that only compulsory or guaranteed overtime payments should be included in holiday pay calculations. In 2015 a Northern Irish tribunal ruled that voluntary overtime should be included, and whilst this was perhaps the writing on the wall, tribunal decisions are not binding, so we had to wait for the first Employment Appeal Tribunal ruling, which we’ve now had. Our full article contains a briefing on what employers should do next.

56 Dudley Council employees participated in a voluntary overtime rota which they could drop on or drop off at will. Once they were on it they were paid a standby allowance and if they were called out they received a call out payment and a mileage allowance. They claimed that the arrangement occurred with sufficient regularity for the allowance, call out pay and mileage to be regarded as ‘normal’ pay and therefore should be counted as such for the 4 weeks minimum leave required by the Working Time Directive (WTD).

Background: Briefly, the WTD is a piece of health and safety legislation that requires workers to have a minimum of 4 weeks leave for the purposes of recuperation. In the UK we provide an additional 1.6 weeks leave, giving workers a maximum of 5.6 weeks. But since the additional 1.6 weeks are not required by the WTD, we don’t count these for ‘recuperation’ purposes and so any arguments about what should and shouldn’t be included in holiday pay is confined to the 4 weeks. So what is the significance of the 4 weeks in terms of holiday pay? The WTD requires employers not to disincentivise employees from taking their holiday, e.g. not wanting to take it because they would receive less money on holiday than when working. On the back of this principle in 2011 in Williams and others v British Airways plc, Williams, a pilot, showed that his flying allowance was an intrinsic part of his pay and so should be paid when he was on holiday. Later the long running Lock Vs British Gas case established that Mr Lock, a salesman, enjoyed commission while he was working, but could not earn it while on holiday. It was ruled he too should be paid average commission when on holiday. Several cases concerning compulsory overtime (i.e. the employer doesn’t have to offer overtime but if they do the employee has to work it) or guaranteed overtime including Bear Scotland Ltd v Fulton and others established that this too must be factored into holiday pay, for the 4 weeks required by the WTD at least. The overarching conclusion from all of these cases is that if any payment is classed as ‘normal pay’ it must be included for the purposes of the statutory 4 weeks of holiday pay.

Returning to the instant case the Employment Appeal Tribunal decided that Willets and his colleagues worked the rota with sufficient regularity for it to be regarded as ‘normal’ and whether the employee had a choice or not was immaterial. The upshot for employers is that we now need to take a good look at our voluntary overtime arrangements on an employee by employee basis and decide whether overtime is worked in each case with sufficient regularity for us to conclude that it is ‘normal’ for the employee to work a level of overtime. That overtime needs to be included in at least 4 weeks of the employee’s holiday entitlement.

And if we don’t? Holiday pay claims can extend back 2 years, so potentially we could be carrying a liability for 2 years underpayment for all employees who receive regular overtime.

If you employ workers on low levels of contractual hours, topped up with additional voluntary hours, this could have a particularly intense impact. If an employer has, say, 10 workers and each worker is contracted to 10 hours per week @ £8 per hour (and it is upon this that holiday pay is based) but actually works 30 hours per week the underpayment is 4 weeks X 20 hours X £8 = £640 per worker, £6,400 for all 10. Given that holiday back pay claims can go back 2 years this means the employer is carrying a liability of £12,800 + NICs

So what to do? If you think you may have an issue step 1 is contact myHRdept. If we agree step 2 will be to implement the new holiday pay calculations from the next available pay period. Once 3 months from the last breach has gone by your employees will be out of time to bring a claim.

If you’re thinking of outsourcing your HR why not contact myhrdept.co.uk. With full service Premium Plus HR & employment law packages from only £140 per month (and start-up packages from just £80 per month) and fixed price HR support options available for one-off issues, we believe we offer the best combination of quality and price available in the UK. Call us on 01628 820515 to discuss your requirements or contact us and we’ll call you back.

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