The Employment Appeal Tribunal has held that payment for voluntary overtime normally worked must be included in holiday pay.
The question in every case, irrespective of the label put on the payment, is whether the payment forms part of the worker's "normal remuneration".
In a decision with major consequences for employers, the EAT in Dudley Metropolitan Borough Council v Willetts and ors held that voluntary overtime that satisfies the "normal remuneration" test must be included in the calculation of holiday pay. This would be for the first four weeks of annual leave provided for by the Working Time Regulations 1998.
The case concerns 56 employees who were employed as specific and multi-skilled tradesmen engaged in the repair and maintenance of the Council’s housing stock. The Council calculated their holiday pay based on their core contractual hours only.
In addition to their core hours, the employees worked voluntary overtime and could join a standby rota for out-of-hours emergency work. An additional payment for all voluntary work, out-of-hours standby and call-outs would then be paid. The Council excluded all of the additional payments from their calculation of holiday pay on the grounds that it was not contractual pay.
The original Employment Tribunal found in favour of the employees, holding that holiday pay must include payments for voluntary overtime, voluntary standby and voluntary call-out payments, where that work has been undertaken with sufficient regularity to have become part of the employee's normal pay. The Council appealed but the Tribunal's decision was upheld.
The EAT's reasoning provides helpful guidance on when voluntary overtime should be included in the calculation of holiday pay:
- The right to paid annual leave is a particularly important principle of EU social law and there is no provision for its derogation.
- EU law requires that "normal" (and not contractual) remuneration must be maintained in respect of the four week period of annual leave guaranteed by the Working Time Directive.
- The overarching principle is that holiday payments must correspond to the normal remuneration received by the worker whilst working.
- The purpose of the above principle is to ensure that a worker does not suffer financial disadvantage by taking leave, which is liable to deter them from exercising this important right from which there can be no derogation.
- In each case, the relevant element of pay (here, voluntary overtime), must be assessed in light of the overarching principle.
- For a payment to count as "normal" it must have been paid over a sufficient period of time on a regular and/or recurring basis, which will be a question of fact and degree in each case.
- Items that are not usually paid or are exceptional are not "normal remuneration". In contrast, items which are usually paid and regular across time may count as "normal remuneration".
- Whether an item constitutes "normal remuneration" does not depend solely on there being an intrinsic link between the pay and the performance of tasks required under the contract of employment. However, if there is such a link then that is decisive of the requirement to include that pay within "normal remuneration".
- In explaining the intrinsic test further, the EAT held that the focus is on the link between the payment and the performance of duties or work that is normally done within the company or for the employer.
- It found that once the employees started working a shift of voluntary overtime, they were performing tasks required of them under their contracts of employment even if there was also a separate agreement or arrangement regarding that voluntary overtime.
By upholding the tribunal's decision, helpful examples of voluntary overtime that can form part of "normal remuneration" on the facts of this case can be seen:
- Out-of-hours standby payments – Voluntarily being on the standby rota once in every four or five weeks over a period of years (with some variation when the employees swapped on the rota) was considered regular enough for the payments to have become part of normal remuneration.
- Call-out allowances – Whilst the rota was voluntary, once on it, the employees were required to attend the call out and this was intrinsically linked to the work required of them. Therefore, the remuneration received for it was part of normal pay.
- Travel allowance – This was designed to compensate the employee for the travel time linked to the overtime work. The part of the allowance that was taxed as a benefit in kind was held to be part of normal remuneration.
- Additional voluntary overtime – Regular voluntary overtime falls within normal pay but not when it is unusual or rare.
This is the first binding decision on the inclusion of voluntary overtime in holiday pay. It provides clear guidance to employers that regular voluntary overtime should be included within the payment for the first 4 weeks of statutory holiday. Voluntary overtime does not have to be included in the holiday pay for the additional 1.6 weeks of holiday provided for under the Working Time Regulations or any additional contractual holiday that an employer may provide.
Employers should be minded to review their current practice with regard to voluntary overtime and holiday pay.