The Employment Appeal Tribunal (EAT) has ruled in the recent case of Dudley Metropolitan Borough Council v Willetts and ors that payments for purely voluntary overtime should be included in holiday pay if they are regular enough to constitute “normal pay”. This is a significant judgment with regards to the treatment of holiday pay and employers with employees who undertake voluntary overtime in particular should take note of this ruling.
Holiday Pay – The Law
Article 7 of the Working Time Directive (WTD) provides that member states must ensure that workers have the right to at least four weeks’ paid annual leave. The WTD does not specify how statutory holiday pay should be calculated; however, it has been interpreted as “normal remuneration“.
Many employers will now be fully aware of the important case of Williams and others v British Airways plc, where the ECJ shed light on the notion of “normal remuneration”. In this case the ECJ said that a worker who is on holiday is entitled to basic salary, as well as remuneration which is “intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment and in respect of which a monetary amount, included in the calculation of his total remuneration, is provided”.
The WTD is implemented into UK law by the Working Time Regulations (WTR 1998). The WTR 1998 provide workers with 5.6 weeks’ annual leave (regulation 13). Workers are entitled to be paid at the rate of a week’s pay for each week of leave.
The full case history behind holiday pay and overtime is beyond the scope of this article. However, a key case on this issue was Bear Scotland Ltd and others v Fulton and others where the EAT held that:
- Article 7 of the WTD requires normal remuneration to be paid during periods of holiday.
- There should be an intrinsic or direct link between the payment claimed and the work a worker is required to carry out.
- Where overtime is required to be carried out, it would be perverse to hold that the resulting overtime pay was not intrinsically or directly linked to the work.
- Article 7 requires non-guaranteed overtime (that is, where the employer is not obliged to provide the overtime, but the worker is obliged to work it if requested) to be paid during annual leave.
So, Bear Scotland resolved the situation for us as far as non-guaranteed overtime was concerned. However, it left the issue of voluntary overtime to be decided.
Our view at the time of Bear Scotland was that voluntary overtime would be treated in the same way as non-guaranteed overtime. This made sense because the decisions were being made based on the requirement to pay normal remuneration during periods of holiday. A worker who worked a lot of voluntary overtime would have a certain level of normal remuneration in exactly the same way as workers working non-guaranteed overtime would.
Whether voluntary overtime – which is when there is no obligation on either side – should be included in holiday pay was not dealt with conclusively in the case of Bear Scotland. However, the issue soon came before the courts.
The case of Patterson v Castlereagh Borough Council considered whether voluntary overtime should be included in statutory holiday pay. Mr Patterson regularly worked overtime on a voluntary basis for which he was paid at the rate of time and a half. Mr Patterson’s holiday pay was calculated by reference to his basic hours only, without taking into account his voluntary overtime. He claimed he had suffered an unlawful deduction from wages.
The tribunal at first instance rejected his claim, deciding that Article 7 of the WTD did not require voluntary overtime to be included in the calculation of statutory holiday pay. Mr Patterson then appealed to the Northern Ireland Court of Appeal.
The Northern Ireland Court of Appeal upheld the appeal. It held that the tribunal had erred in finding that voluntary overtime should not, as a matter of principle, be included in statutory holiday pay.
Patterson was the first appellate decision to directly address whether voluntary overtime should be included in statutory holiday pay. However, it was a decision in Northern Ireland.
The case of Dudley
In the case of Dudley Metropolitan Borough Council v Willetts and ors, the EAT has confirmed that regular payments for voluntary overtime should be taken into account in calculating employees’ holiday pay.
A group of 56 employees who undertook housing repairs for Dudley Council claimed that they had not received the correct amount of statutory holiday pay. Each employee had fixed contractual hours, but as well as this, the employees volunteered to perform additional duties which were not required to under their contract of employment. Notably, the Council had no right to enforce this work (in contrast with non-guaranteed overtime, for example). The elements of pay for the additional voluntary hours worked which were in dispute were as follows:-
- Out of hour’s standby pay;
- Call out allowance;
- Mileage or Travel Allowance linked to the above.
Claims for unlawful deductions from wages were brought before an employment tribunal.
The tribunal considered the case law on Article 7 of the Directive and the WTR 1998 (some of which cited in this article). The tribunal acknowledged that it was ‘sailing into uncharted waters’ on the issue of purely voluntary overtime. The tribunal focused on the basic principle that workers should not be deterred from taking holiday, and that employees who received standby allowances consistently and regularly should have this included in their holiday pay. In this case, although participation in the standby rota was voluntary, once an employee’s name was on the rota he or she was required to attend work if called upon, and the call-out payment was intended to reimburse him or her for the inconvenience. As a result, the tribunal ruled that it was intrinsically linked to the work required under the contract. This was a crucial factor in the tribunal’s decision.
The tribunal also decided that the portion of the mileage allowance that was taxable as a benefit in kind was part of the claimants’ normal pay and should count towards their statutory holiday pay. The Council appealed to the EAT.
The EAT dismissed the appeal. In doing so, the EAT referred to the notion of normal remuneration and concluded that whether a payment is normal will be a question of fact and will depend on how regularly the payment is made. The EAT ruled that an intrinsic link between the payment and the performance of tasks required under the contract is a decisive factor will go towards the issue of whether it is included within normal remuneration. However, the EAT also said that this is not the only decisive factor.
In this case, the EAT held that the tribunal was correct in deciding that the voluntary overtime pay was paid with sufficient regularity to amount to normal remuneration. The arrangement for voluntary overtime would not exist in the absence of a contract of employment. The employees were performing tasks required of them under their contracts of employment even if there was also a separate arrangement. As soon as the shifts or standby periods began, the payments made were all directly linked to tasks they were required to perform under their contracts of employment and they were in no different position from an employee who is required by his or her contract to work overtime or be on standby or attend callouts.
Lessons for Employers
This is a significant (albeit not unexpected in our view) ruling with regard to calculating holiday pay and employers must now include voluntary overtime in calculating an employee’s holiday pay. This will be on a case by case basis, however. Some key factors for employers to consider include:-
- Payments for purely voluntary overtime should be included in holiday pay if they are regular enough to constitute “normal pay”.
- Payments need to be made for a sufficient period of time to qualify as “normal”. Occasional payments (i.e. sporadic overtime) might not qualify as being “normal remuneration”.
- Whether the voluntary overtime is intrinsically linked to the work required under the contract of employment.
This is an area of law which has developed quickly in recent years. Some employers have been reluctant to change their pay arrangements and have been waiting for further case law. The law is now becoming settled and employers who are not paying holiday pay which reflects a worker’s normal remuneration (whether this relates to commission or overtime) will be falling foul of the law.