When is voluntary overtime included in holiday pay?

Background

The Working Time Regulations confirm that workers are entitled to be paid during statutory annual leave at a rate of a week's pay for each week of leave. Under EU law, holiday pay must correspond with ‘normal remuneration’.

Two well-publicised cases, Lock v British Gas Trading Ltd (Case C-539/12) and Bear Scotland Ltd v Fulton (UKEATS/0047/13), have already confirmed that commission and non-guaranteed overtime should be included in the calculation of holiday pay where they constitute ‘normal remuneration’.

However, until the Dudley case, there had been no definitive guidance on whether the same principle should extend to entirely voluntary overtime.

Facts

A group of 56 employees claimed that they had not received the correct rate of statutory holiday pay. Each employee had set contractual hours, but they also volunteered to perform additional duties that their contracts of employment did not require them to carry out. The additional work was done by the employees voluntarily, with the Council having no right to enforce the additional work.

The employees contended that their holiday pay calculation should include the voluntary overtime.

Judgment

The EAT echoed the decisions in Lock and Bear Scotland and concluded that, even where overtime is entirely voluntary, it should be included in the calculation of holiday pay where voluntary overtime pay is part of an employee’s normal remuneration.

Comment

What is important for employers to take away from this case is the definition of ‘normal remuneration’.

In her judgment, Simler P helpfully set out guidance on what ‘normal’ means in this context:

• The payment must have been paid over a sufficient period of time and/or on a recurring basis; and
• Items that are not usually paid or are exceptional don’t count, but items that are usually paid and regular across time may do so.

The EAT also gave an example that: “a payment is normally made if paid over a sufficient period of time on a regular basis, say for one week each month or one week in every five weeks, even if it is not paid more frequently or even each week”.

Put simply, 'normal pay' is that which is normally received. The key question suggested by the EAT is: what would the worker have earned if they had not taken leave?

We are of the view that:

• In cases similar to the Dudley case, where the pattern of overtime is settled (even if the overtime is voluntary) and there would be no difficulty identifying this as normal pay, the calculation of holiday pay should include overtime pay that forms part of a settled pattern of work. The same rule would apply to any other payments in respect of other voluntary/additional work where there is a settled pattern of work;
• In cases where the pattern of payments (whether it be voluntary overtime or payment for any additional work required to be performed) is not settled, and there is, therefore, no normal pay, employers may be able to argue that such additional payments don’t need to be taken into consideration as part of the holiday pay calculation;
• Where staff are working more sporadic, voluntary overtime, careful consideration is needed about whether a worker could argue that there is still a regular pattern of voluntary overtime. If they could, these payments for voluntary overtime would be classed as normal pay and included in the calculation of holiday pay; and
• Where there is no regular pattern and voluntary overtime is worked on an ad hoc basis, our view is that this payment would not form part of normal pay and therefore would be unlikely to count for holiday pay purposes.

We recommend that employers review their holiday pay arrangements to ensure that any additional ‘normal’ payments on top of base salary are included in their calculations. To help you, we have developed a fixed-fee audit offer where we can review your arrangements and provide commercial advice on any required changes.

In addition, we have produced a fixed-fee toolkit that sets out the legal position and provides guidance to achieving compliance. To purchase a copy of our toolkit, please email Lynsey Harrison, or contact her on 0121 214 3615.

For more information

For more information on holiday pay or anything else discussed in this article, please get in touch with your usual contact in our Employment Team or speak to Rebecca Reid. Please visit our website to find out more about our employment work.

Related articles:

• Employee holiday – how much do you pay? - view the article here
• To pay or not to pay? – More scrutiny over holiday pay - view the article here
• Employers’ relief – the “3-month rule” in holiday pay (and other) claims - view the article here