In an important development in holiday pay caselaw, the Employment Appeal Tribunal (EAT) has confirmed in Dudley Metropolitan Borough Council v Willetts and Others that voluntary overtime can qualify as “normal remuneration” for the purposes of calculating holiday pay. The EAT stated that a payment will be “normal” for these purposes where it is paid over a sufficient period of time on a regular basis.

The status of voluntary overtime when calculating holiday pay

This is the first binding EAT decision on the status of voluntary overtime when calculating holiday pay. It is a significant development and one which is likely to affect a broad range of employers who have been holding the line that voluntary overtime need not be included in holiday pay calculations. The case concerned a range of voluntary payment types meaning that, as well as those businesses that operate voluntary overtime arrangements, any employers using other voluntary practices (such as standby and on-call arrangements) are likely to be affected.

The key points from the EAT’s decision are:

  • Workers are entitled to “normal remuneration”, not just contractual pay, during the four weeks’ annual leave provided for under the EU Directive. The pay workers receive in respect of that annual leave must correspond with (and not be merely broadly comparable to) their “normal remuneration”.
  • While a payment which is intrinsically linked to the performance of tasks under the contract of employment (which had been the test applied in previous cases) will always be “normal remuneration”, the absence of such an intrinsic link does not automatically exclude a payment from counting as “normal remuneration”.
  • Even if its conclusion was wrong on this point, the EAT concluded that the various voluntary payments in this case (including voluntary overtime and voluntary standby payments) were intrinsically linked to the performance of tasks under the contract of employment in any event.
  • Determining whether a given payment qualifies as “normal remuneration” is a question of fact to be determined by a tribunal. The frequency and regularity of the payment will be relevant factors for the Tribunal to consider - items which are not usually paid or which are exceptional will not qualify as “normal remuneration”, whereas items which are usually paid and regular across time may qualify as “normal remuneration”.
  • Though it was not specifically asked to address the question of reference periods, the EAT also appeared to endorse the use of a 12 week reference period when calculating holiday pay.

Comment

The EAT offered little by way of further guidance on what level of regularity or frequency is required in order for a payment to qualify as “normal remuneration”. This is a question which employers and future tribunals are left to grapple with and, therefore, a good deal of uncertainty remains. By way of an example, in this particular case, payments made over a period of years at a rate of roughly 1 week in 4 or 1 week in 5 were sufficiently regular.

It is possible that the council will appeal to the Court of Appeal – we will issue an update when we know more.