In the latest instalment to the litigation surrounding the correct calculation of holiday pay, the EAT has held that payment for voluntary overtime that is normally worked is within the concept of ‘normal remuneration’ and should therefore be taken into account in calculating holiday pay for the 4 weeks of holiday provided for by the Working Time Directive (WTD). This is the first binding decision in England and Wales on the issue of voluntary overtime.

In Dudley Metropolitan Borough Council v Willetts and others, the tribunal considered whether a number of different payments should be treated as forming part of a worker’s ‘normal remuneration’ for the purposes of WTD holiday. Each of the following elements was in dispute i) out-of-hours standby pay; (ii) call-out allowance; (iii) voluntary overtime; and (iv) mileage or travel allowance.

In this case, the claimants were employed in a number of different roles with set contractual hours. However, the claimants were also able to volunteer to perform additional duties which their contracts of employment did not require them to carry out. In effect, they could drop on, or off, a rota to perform on-call and additional overtime work as they so wished, essentially to suit themselves.

The employment tribunal had held that, in line with previous case law, when calculating holiday pay it was required to take into account anything ‘required of the claimant under his contract of employment which is intrinsically linked to the performance of the required tasks’ but that it could not take account of ‘occasional or ancillary costs’.

Applying this to the facts of the case, the employment tribunal had found that out-of-hours standby pay and call-out allowances did form part of the claimants’ normal remuneration and should therefore be included in holiday pay. In relation to voluntary overtime, the employment found that it formed part of normal remuneration for employees who undertook it regularly. For travel allowances, the tribunal held that any part of the allowance which is subject to tax as a benefit in kind would be part of normal remuneration. These findings were appealed to the EAT.

The EAT upheld the findings of the tribunal. It said that EU law requires that normal (not contractual) remuneration must be maintained in respect of the 4 weeks’ WTD leave – the purpose of this requirement is to ensure that a worker does not suffer a financial disadvantage by taking leave which is liable to deter them from exercising their right to take that leave. The EAT said that the ECJ had confirmed that for payment to count as ‘normal’ it must have been paid over a sufficient period of time and that this is a question of fact and degree. Normal remuneration would not include items which are not usually paid or are exceptional.

The EAT said that the test for establishing ‘ normal remuneration’ is not solely dependent on a link between pay and the performance of duties required by the contract of employment; it said that, if there is an intrinsic link, that is decisive of the requirement that it be included within normal remuneration. However, it is a decisive criterion but not the, or the only, decisive criterion. An absence of an intrinsic link does not automatically exclude a payment from counting, a position which it said is supported by the fact that payments personal to an individual such as those relating to seniority and professional qualifications count for normal remuneration purposes even though they are not intrinsically linked to the performance of the tasks that the worker is required to carry out.

The EAT went on to say that excluding payments for voluntary work normally undertaken would amount to an excessively narrow interpretation of ‘normal remuneration’ which would risk a worker suffering a financial disadvantage which might then deter them from taking holiday. In a case where the pattern of work – though voluntary – extends for a sufficient period of time on a regular and/or recurring basis so as to justify the description ‘normal’ it will need to be included in holiday pay. It will be for the tribunal to determine whether any such payments are regular and settled enough to amount to normal remuneration.

In the alternative, the EAT said that even if an intrinsic link was required, that link did exist in this case; without a contract of employment the arrangements for voluntary overtime would not exist. The EAT said that once an employee 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.

In relation to call-out allowances, the EAT again upheld the findings of the tribunal that these were normal remuneration; it said that if the payments are normally paid they must be included in holiday pay to ensure there is no financial disadvantage to the worker as a result of taking the leave. For out-of-hours payments, the EAT again held these should be included in normal remuneration, emphasising that the focus is on normal remuneration, and not the normal working week. It repeated that whether a payment is normal is a question of fact and degree and that questions of frequency and regularity are likely to be relevant. The EAT had no difficulty with concluding that a payment is normally made if paid over a sufficient period of time on a regular basis, even if it is not paid very frequently. The EAT said that it did not accept that if workers have the opportunity to take annual leave in weeks with no overtime or out-of-hours shifts this would mean they were not deterred from taking holiday. A deterrent effect could be inferred from the reduction in remuneration itself.

Impact for employers

The outcome of this case is not surprising, following the recent trend in case law on the correct calculation of holiday pay. However, its binding status as an appellate level decision, does also bring some clarity to the issue of the inclusion of voluntary overtime payments in holiday pay.

Employers may still face practical difficulties with some payments, however, in determining whether, as a matter of fact and degree, they do constitute ‘normal remuneration’ and, if so, in then determining the appropriate reference periods to make the relevant calculations.

Employers will also need to consider carefully how holiday pay is dealt with in the employment particulars required by section 1 Employment Rights Act 1996, which states that the particulars relating to holiday pay must be ‘sufficient to enable the employee’s entitlement ….to be precisely calculated’.