In Dudley Metropolitan Borough Council v Willetts and others UKEAT/0334/16/JOJ, the Employment Appeal Tribunal held that voluntary overtime that is normally worked should be included when calculating an employee's holiday pay.

Over the past few years, there have been a number of high-profile cases that have considered how employers should calculate statutory holiday pay for their workers and to what extent employers should take account of variable payments that fall outside of basic salary, such as commission and overtime.

The extent to which overtime should be included has been particularly problematic, with employment tribunals previously drawing distinctions between different types of overtime.

The rules for calculating statutory holiday pay are set out in the Working Time Regulations 1998 (WTR), which implement the European Working Time Directive (WTD).

The WTD requires that workers receive 'normal remuneration' when taking any holiday entitlement under the WTD (the first 20 days per year for those who work five days per week). One of the key principles of the WTD is to ensure that workers take their full holiday entitlement; stating that workers must receive 'normal remuneration' while on paid leave is intended to ensure that workers are not dissuaded from taking annual leave by receiving less than their normal pay during this time.

This requirement can cause problems where workers receive variable payments on top of their basic salary, as a worker's monthly pay is likely to vary and it is not always clear what constitutes 'normal remuneration' for the purposes of calculating holiday pay.

In the case of Bear Scotland and others v Fulton and others, the Employment Appeal Tribunal (EAT) held that overtime that a worker is obliged to work, if requested, should be included as part of 'normal remuneration', if the worker does overtime on a sufficiently regular basis. The EAT did not clarify the situation concerning voluntary overtime (that is, where a worker is not obliged to do any overtime offered), as the case did not concern overtime of this type.

There have been a number of employment tribunal (ET) decisions that have suggested that voluntary overtime should be included when calculating 'normal remuneration' but ET-level decisions are not binding. The law has therefore been somewhat unclear and employers have been waiting for a case to reach the EAT, in order for it to provide a binding judgment to clarify this area.

Mr Willetts and four other lead claimants (on behalf of 56 Council employees) brought claims for unlawful deduction of wages against Dudley Metropolitan Borough Council (the Council).

The employees, who worked for the Council as electricians, plumbers, roofers, storemen, operations officer and quick response operatives, were contracted to work 37 hours per week, with many having an additional right to work overtime. The employees also performed additional voluntary duties, such as working out-of-hours standby shifts, attending call-outs and working voluntary overtime, for which they received additional payments.

The Council did not include payments for voluntary overtime, standby shifts or call-outs when calculating 'normal remuneration' for the purposes of calculating statutory holiday pay.

The employees claimed that these payments should have been included when calculating 'normal remuneration' and that their holiday pay had been unlawfully underpaid as a result.

The ET held that the payments were intrinsically linked to the performance of the employees' duties and that they performed the duties with sufficient regularity for the payments to be considered 'normal remuneration'.

The ET therefore found in favour of the employees and ordered the Council to pay the employees for the underpayment of holiday pay. The Council appealed to the EAT.

The EAT dismissed the Council's appeal and confirmed that payments for voluntary overtime, standby shifts or call-outs must be included when calculating 'normal remuneration', where the payments are received with sufficient regularity.

The EAT noted that whether a payment is received regularly enough to count as 'normal' is a question of fact and degree, although it did not set out rules for deciding this.

A judgment on the status of voluntary overtime has been anticipated for some time and the outcome is not surprising given the case law on other variable payments, such as commission.

As voluntary overtime payments are the most common form of overtime, many employers have been waiting for a binding decision on whether to include this in holiday pay calculations, prior to making changes to their payroll systems.

Employers who pay voluntary overtime, as well as stand-by payments, call-out payments or payments for other forms of voluntary work, should now consider how they will adjust their payroll systems to calculate holiday pay correctly.

However, it should be noted that these payments will only need to be included in statutory holiday pay calculations where they are made with 'sufficient regularity' to count as 'normal remuneration'.

The EAT's judgment does not give clear guidance on what 'sufficient regularity' means and this is not likely to become clear until we have further case law on this point.

Our view is that employers should review the regularity with which a worker receives these payments, to see if there is a discernible pattern, as well as considering the total value of the additional payments over the course of the holiday year.

Where there is a discernible, regular pattern of payments or where the total value of the payments is sufficient to materially impact the worker's holiday pay over the course of the year, employers should consider taking advice about their obligations.

It is possible that the Council will appeal against this decision and we will keep you informed.