It should not come as a surprise to many employers, but the Employment Appeal Tribunal (EAT) has now ruled that voluntary overtime should be included in holiday pay if it is paid sufficiently regularly to amount to normal pay.
The EAT in Dudley Metropolitan Borough Council v Willetts & Others (previously known as White & Others v Dudley Metropolitan Borough Council, then Brettle & Others v Dudley Metropolitan Borough Council at the Employment Tribunal (ET) stages) has now provided binding authority indicating that affected employers should include voluntary overtime payments when calculating holiday pay, at least for the 4 weeks’ minimum holiday provided for in the EU Working Time Directive.
Ever since Bear Scotland v Fulton and Baxter & others in 2014, it has been clear that both guaranteed (compulsory) and non-guaranteed overtime must be included in holiday pay. Voluntary overtime has been less clear. Until now there has been no binding decision (except in Northern Ireland). Many employers have therefore waited, despite a clear “direction of travel” in cases from the European Court of Justice (ECJ) and at ET level in the UK, which suggested that voluntary overtime should also be included in holiday pay.
56 employees of Dudley Metropolitan Borough Council (the Council) claimed that their holiday pay did not reflect contractual overtime (2-4 hours per week), voluntary overtime, standby out of hours, call-out time and taxed payments when called out (effectively mileage at an enhanced rate). Most of the claimants were voluntarily on a rota for standby out-of-hours emergency work, with call-out if required. Some had been on it over 10 years, but they accepted they could come off the rota whenever they wanted and could swap in and out of rota shifts. Some did other types of overtime.
The claims were for unlawful deduction of wages, categorised as a series of “deductions”, each time the claimants’ holiday pay was underpaid.
Employment Tribunal ruling
For those without normal hours of work, holiday pay is based on average weekly remuneration over the preceding 12 weeks, so overtime is included. For those with normal hours of work, in determining whether payments should be included in holiday pay, the ET had to consider:
- Were these payments contractual, as a result of custom and practice?
- Were the payments intrinsically linked to the individual’s work?
- Were they paid with sufficient regularity to be considered a part of the individual’s normal remuneration?
The ET found that because the claimants could swap in and out and the employer had no right to force anyone to be or stay on the rota, there was no implied contractual term.
Secondly, the ET concluded that the payments were intrinsically linked to the claimants’ work. It noted comments of the EAT in Bear Scotland confirming that pay includes every emolument “arising out of a worker’s employment”.
Finally, the ET considered that the test was: what is normal pay? Applying this to the claimants:
- the out of hours standby allowance was paid to the claimants over several years where they had worked overtime 1 week in every 4 or 5, and was found to be part of “normal pay”;
- the call-out allowance also reflected “normal” remuneration and although the rota was voluntary, once on it the claimants had to attend the callout;
- an enhanced travel allowance, which was partly a benefit in kind based on mileage, was also part of normal pay, as far as it exceeded reimbursement for travel expenses;
- additional voluntary overtime could be part of normal pay depending on each claimant. For claimants doing overtime very rarely, it was not part of normal pay. For others, it was expected under their job description, so was bordering on non-guaranteed overtime (if the employer asked them to it, they were obliged to). For others, it was purely voluntary, but if undertaken nearly every week it was part of normal pay.
The Council appealed to the EAT.
Employment Appeal Tribunal ruling
The basis of the Council’s appeal was that the decisions of the ECJ on holiday pay, such as in Lock v British Gas Trading Ltd, relied on an “intrinsic link” between the payment and the performance of tasks required by the contract of employment. The Council argued that for voluntary overtime this link was missing, and that voluntary overtime is performed by reference to a separate agreement between the parties.
For the claimants, it was argued that the overarching principle is that workers should not suffer financial loss by taking holiday (which might deter them from taking that holiday).
The EAT accepted the arguments of the claimants, on the basis that the ECJ had made clear that holiday pay should correspond to the normal pay received by the worker while working, not just their basic contractual entitlement. Otherwise employers could lower contractual hours and categorise remaining working time as being “voluntary overtime” in an attempt to reduce holiday pay. The EAT specifically referred to the proliferation of zero hours’ contracts as an example of this.
It concluded that it will be for ETs to decide in each case whether “the pattern of work, though voluntary, extends for such a sufficient period of time on a regular and/or recurring basis to justify the description ‘normal'”. In this case the EAT accepted the ET’s ruling above as to the payments that had to be included in holiday pay.
The EAT commented that if the “intrinsic link” point was key, there was an intrinsic link simply by virtue of the contract of employment and the fact that here the duties or tasks are directly linked to the tasks performed under the employees’ contract of employment.
The EAT also rejected the argument that voluntary overtime performed once a month was not part of normal pay since the employee could take one or two weeks’ holiday in between and not be deterred from taking holiday if that overtime were not included.
This ruling confirms, and is now binding on other ETs, that voluntary overtime and other related payments should be included in holiday pay. However, it also confirms that it will be down to each case for ETs to determine whether the overtime was regular enough to be part of “normal pay”. Here, overtime once every 4-5 weeks was considered to be included in “normal pay”. However where voluntary overtime is less regular, employers may have arguments that it is not part of “normal pay”.
Employers should also remember that this ruling only applies to the minimum 4 weeks’ holiday guaranteed under EU law. The additional 1.6 weeks’ holiday in the UK is not subject to these rules, nor is any further contractual holiday.
No mention was made of the ET’s original conclusion that, unless otherwise stated, the minimum 4 weeks’ holiday is deemed to be taken first, so it is not clear whether that principle is binding on other ETs. However, employers may well be aware that the EAT recently confirmed again its decision in Bear Scotland that a series of deductions claim cannot go further back where there is a gap of more than 3 months between underpayments.
With ET fees now abolished, there could be an immediate rise in claims for underpaid holiday pay relating to voluntary overtime, because there will be no barrier to claims for even relatively small sums. Employers will now need to ensure they establish a mechanism going forward for including in holiday pay such payments which are regular and long-lasting enough to be considered part of “normal pay”. Alternatively, the recent litigation could be used to put overtime practices in the spotlight and ensure managers are approaching them correctly. Through adjusting their practices, for example being more stringent about the use of overtime at all, some employers have been able to make cost savings as well as avoid exposure to claims. How claims for backdated holiday pay are dealt with will depend on each case. Please contact us for further information.
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