In the recent case of Dudley Council -v- Willet, the Employment Appeal Tribunal held that regular, long running voluntary overtime should be included in holiday pay calculations.
While this decision is not surprising, and does not represent a departure from the principles established in previous case law, it confirms their application to voluntary overtime and provides a good opportunity to recap recent developments in this area.
Types of overtime
There are three broad categories of overtime:
1. Compulsory overtime
This is overtime which employees are required to work and which forms part of their normal working hours, meaning it must be taken into account when calculating holiday pay entitlements.
2. Non-guaranteed overtime
This is overtime which the employer is not obliged to provide but which the employee must accept if offered.
Following a series of European and domestic case law over the past few years, it is now clear that non-guaranteed overtime must be taken into consideration for the purposes of the calculation of holiday pay if that overtime is intrinsically linked to the employee's duties under their contract of employment and sufficiently regular.
3. Voluntary overtime
This is overtime which the employer is not obliged to offer and (even if offered) the employee is completely free to turn down.
In keeping with developments in this area, the Employment Tribunal in the Willet case found that voluntary overtime should be treated in the same way as non-guaranteed overtime for the purposes of holiday pay calculations.
When is overtime 'sufficiently regular'?
Overtime hours which are carried out regularly or repeatedly over a sufficient period of time are liable to be included in holiday pay calculations.
Working a few extra hours here and there over the course of several months with no discernible pattern and lengthy breaks in occurrence is not likely to satisfy the 'sufficiently regular' requirement.
By contrast, an employee who works an extra two hours every Friday and Saturday on a long-standing basis (whether this is continually throughout the year or, for example, every other month or just throughout peak trading times) will have a very strong argument to say their holiday pay should be enhanced to take account of their overtime hours.
In the middle of these illustrative examples is a grey area which will no doubt be the subject of further case law. The EAT in Willet concluded that overtime carried roughly every fourth or fifth week over several years was sufficiently regular to be counted for holiday pay purposes.
When is overtime intrinsically linked to an employee's duties and is this always necessary?
Following the Bear Scotland case it has been understood that there should be a direct link between the work that a worker is required to carry out and the overtime payment claimed in order for it to be counted for the purposes of holiday pay calculations.
However, the EAT in Willet held that an intrinsic, or direct, link should not be a decisive factor, citing previous examples of payments which should be included in holiday pay calculations given by the European Court of Justice, such as payments linked to professional status.
What reference period should be used when calculating holiday pay?
Suggested reference periods have ranged from 12 weeks to 12 months. However, no firm standard has been set. The EAT in Willet seemed to endorse the idea of a 12 week reference period, although this did not form part of its judgment.
With no firm guidance at this stage, the appropriate reference period is likely to depend on the particular circumstances. The guidance from the cases of Lock and Williams is that the reference period must be a representative normal period which reflects the normal working pattern of employee.
What portion of an Employee's annual leave entitlement is affected by the developments in this area?
Under European Law, workers must be provided with an opportunity to take four weeks' annual leave in each holiday year. However domestic provisions are more generous, allowing for an additional 1.6 weeks on top of that entitlement (via the Working Time Regulations 1998).
The current positon is that the requirement to factor in overtime (and other relevant payments) into holiday pay calculations applies only to holiday pay for the four weeks of entitlement provided for under European Law. The remaining 1.6 weeks which must be offered to comply with domestic law (as well as any additional entitlement provided for under contracts of employment) can be paid at the usual rate, without reference to non-guaranteed or voluntary overtime.
There is no firm guidance on what element of the holiday entitlement (i.e. European entitlement, UK entitlement or additional contractual entitlement) is deemed to be taken at any particular time during the holiday year. There has been a suggestion from the EAT in Bear Scotland that employers may decide which type of leave is taken by a worker at any given time.
This could lead to employers which have very specific peak trading times treating all holiday taken during, or soon after, their standard busy as UK or contractual entitlement in a bid to circumvent the need to enhance holiday pay by reference to the likely significant overtime worked in the proceeding period. In practice, however, the cost and time of administering such a system of distinction could prove to be a deterrent.
What if Employers get it wrong?
If an employee considers that they have not been paid their full holiday pay entitlement, they can make an unlawful deduction from wages claim in the employment tribunal.
Such claims must usually be brought within three months of the underpayment or the last underpayment in a linked series (unless it was not reasonably practicable to do so). As the case law on this topic unravelled, employers (who had historically calculated holiday pay in line with their fair belief in terms of what was required) began to naturally worry about the extent of their historic liability following the change in position brought about by case law.
The Deduction from Wages (Limitation) Regulations 2014, which came into force on 8 January 2015, introduced a limit on holiday pay claims, as well as many other types of unlawful deduction from wages claims in relation to wages, so that these can now only go back two years.
Within that period, any gap of three months in a linked series of holiday pay 'underpayments' will break the chain and provide the cut-off point for the claim.
As these types of claims relate alleged breaches of a statutory right to holiday pay, breach of contract claims (which can be brought within six years of the relevant breach) in respect of unpaid holiday pay may have no mileage.
What should employers do now?
While employers have largely begun to reassess holiday pay calculations in light of previous authorities relating to non-guaranteed overtime, many have been waiting to see what further developments were made before assessing their position in respect of voluntary overtime.
Now that we have a binding EAT decision on voluntary overtime, employers may wish to audit any potential liability in respect of recently taken 'European entitlement holiday' and consider whether their system of calculation needs to be amended going forwards.