Holiday pay should include ‘regular and settled’ voluntary overtime

It is well established that in accordance with European law (the Working Time Directive (WTD)), holiday pay must reflect a worker’s ‘normal remuneration’.  Problems have arisen because the calculation required under our domestic law, the Working Time Regulations 1998 (WTR), does not necessarily reflect this principle. Various working arrangements have now come before Employment Tribunals (ETs) to consider whether a payment received by a worker is part of their normal remuneration and must be reflected in holiday pay. Whilst non-guaranteed overtime was considered by the Employment Appeal Tribunal (EAT) in the Bear Scotland case, one unresolved area to date has been the status of payments made for purely voluntary overtime – overtime which an employer is neither required to offer, nor a worker required to accept.  The issue came before the Court of Appeal in Northern Ireland but the decision was not reached after full argument. It has now been considered by the EAT in Dudley Metropolitain Borough Council v Mr G Willetts and Others, providing employers with some welcome guidance.

Voluntary overtime may form part of a worker’s ‘normal remuneration’

The EAT has confirmed that voluntary overtime may form part of a worker’s normal remuneration.  Emphasising that the right to paid annual leave is a ‘particularly important principle of EU social law‘ and that holiday should be paid at a rate that is ‘at least his normal or average remuneration’, the EAT rejected arguments that voluntary overtime payments should not be accounted for as there was no intrinsic link with the performance of the employment contract –  i.e. there was no compulsion to perform the work under the contract.  It noted that the WTD draws no distinction between work that involves tasks that are contractually required and those that are done ‘as a consequence of volunteering to be on standby, or callout, or working overtime under special or separate arrangements‘.  The EAT concluded that ‘if payments for voluntary shifts, standby or callout payments are normally paid they must be included in pay for holiday leave to ensure that there is no financial disadvantage as a result of taking such leave, irrespective of the source of the obligation to perform the work in question’. 

Indeed, the EAT indicated that, even if it was wrong on that point, these payments should be regarded as coming within the umbrella of the employment contract and hence would satisfy the requirement to be linked.

But only where it is ‘sufficiently regular and settled’

The EAT, however, confirmed that the doors are not now wide open for all payments to be treated in this way. For payments to be considered as ‘normal remuneration’ they ‘must have been paid over a sufficient period of time’.  The pattern of work, though voluntary, must have extended for a sufficient period of time ‘on a regular and/or recurring basis to justify the description normal’.  Items which are ‘not usually paid’ or ‘are exceptional‘ do not count for these purposes.

What is ‘regular and settled’? A payment every week? A payment every five weeks? 

The EAT indicated that whether or not a payment is sufficiently regular and settled will be a question of fact and degree, to be judged on the facts of each individual case.  It emphasised that the focus of the WTD is on ‘normal remuneration’ and not the ‘normal working week’.  It therefore saw ‘no difficulty in principle in concluding that a payment is normally made if paid over a sufficient period of time on a regular basis, say for one week in every five weeks, even if it is not paid more frequently or even each week’. The ET was therefore right to find that pay for working voluntary overtime on this basis was part of a worker’s normal remuneration.

Following this logic, the payments in issue here were neither exceptional nor unusual and any fluctuations in the amount paid would be catered for by the 12 week average provided for calculating holiday pay under the WTR.  The EAT confirmed that it made no difference that a worker had an opportunity to take annual leave in a week with no overtime or out of hours shifts.

What now for employers?

This outcome is not unexpected and reflects the approach which many employers have been adopting in auditing the payments made to their workforce to identify those, which, due to their nature and regularity, may fall within the scope of ‘normal remuneration’ for the purposes of the WTD.  It is certainly not the case that all voluntary overtime and other ad hoc payments must now be reflected in holiday pay; the EAT was very careful to stress that each case must be determined on its own facts.

The EAT confirmed that it was now a question for future ET hearings whether each individual, in the cases which were the subject of the appeal, suffered a loss as a result of taking leave when he or she did, and this requires a focus on issues such as: the working pattern of each individual; what they normally did at work and when; and what they would have earned if they did not take annual leave.

Holiday pay remains very much a ‘live’ issue and one which is unlikely to be satisfactorily resolved by any legislative reforms in the near future.  If you would like any further advice in light of this decision, or wish to discuss your approach to holiday pay more generally, please contact one of the experts listed below or your usual Osborne Clarke contact.