7th Sep 2016

Holiday Pay must include voluntary overtime

Holiday Pay must include voluntary overtime – that’s what an employment tribunal has recently decided in the latest case in the long running saga of what should (and should not) be included when calculating a worker’s holiday pay. The tribunal also ruled that voluntary standby and call out payments should be reflected in holiday pay (Brettle and Others v Dudley Metropolitan Borough Council). 

Berwins' Employment Law specialist, Mike Patterson explores the case and what it means for businesses 


The Background

Before looking at the facts of this particular case, it’s worth setting out the background as to what the law requires (in Europe and the UK) and where we are up to when calculating holiday pay, including some of the key decisions so far on what has been a tricky area for employers (and lawyers) to get their heads around.

Under European law, article 7 of the Working Time Directive (WTD) provides that member states must ensure that workers have the right to at least 4 weeks paid annual leave. The WTD is implemented into UK law by the Working Time Regulations 1998 (WTR). 

The WTR provide workers with 5.6 weeks annual leave (including the 4 weeks from the WTD). Workers are entitled to be paid at the rate of a week’s payfor each week of leave, calculated in accordance with sections 221 to 224 of the Employment Rights Act 1996. 

"Workers are entitled to be paid at the rate of a “week’s pay” for each week of leave" 

This means that for workers with normal working hours, a “week’s pay” will usually be calculated with reference to those fixed hours, ignoring payments for overtime.

For those who don’t have normal working hours, a week’s pay will be based on their average weekly remuneration (including overtime pay, bonuses and commission) calculated over a 12 week reference period. 

Although the WTD does not specify how statutory holiday pay should be calculated, it has been interpreted as “normal remuneration” and a couple of key European decisions have influenced on how holiday pay claims have been decided in the UK tribunals.  


European Cases

In Williams and others v British Airways plc, the European Court of Justice (ECJ) ruled that “workers must receive their normal remuneration for that period of rest”. The ECJ expanded on the concept of “normal remuneration” to hold that a worker on holiday is entitled to not only basic salary, but also to remuneration which is “intrinsically linked to the performance of the tasks, which he is required to carry out under his contract of employment”.

"workers must receive their normal remuneration for that period of rest"

In the subsequent case of Lock v British Gas Trading Limited, the ECJ held that holiday pay under the WTD cannot be calculated based on basic salary alone and where a worker’s remuneration includes commission determined on sales achieved – that commission must also be included. The reasoning being that if commission is not taken into account, the worker will be placed at a financial disadvantage when taking annual leave as no commission will be generated during their holiday period.  As a result, the worker may be deterred from taking annual leave, which would be contrary to the WTD.


UK Cases   

These European decisions led to many questions about the way the WTR approach the calculation of holiday pay, which uses the same formula of a “weeks pay” from the above sections of the Employment Rights Act 1996. 

As such, a number of cases have been brought in the UK employment tribunals, in which workers have challenged their employers’ calculation of holiday pay based on basic salary alone, and have sought to include elements such as commission, overtime pay, attendance bonus and travel allowances into holiday pay. 

"a number of cases have been brought in the UK employment tribunals, in which workers have challenged their employers’ calculation of holiday pay"

In Bear Scotland Ltd v Fulton and others the employment appeal tribunal (EAT) held that non-guaranteed (but compulsory) overtime should be included in holiday pay provided that it was “normal remuneration”.  

So, what about voluntary overtime, I hear you ask? 

This was not considered in the Bear Scotland case, but did come before the Northern Ireland Court of Appeal in the case of Patterson v Castlereagh Borough Council.  Here, it was held that there was no reason why voluntary overtime should not be included in the calculation of statutory holiday pay. It was a question of fact for each tribunal to decide whether or not the voluntary overtime is normally carried out, and the remuneration is sufficiently permanent to mean it should be included.     


The Facts

So, moving onto the latest decision in Brettle and Others v Dudley Metropolitan Borough Council:

The 56 claimants were employed by Dudley Metropolitan Borough Council (Dudley) as tradesmen involved in the repair and maintenance of Dudley’s housing stock.  The claimants had fixed contractual working hours and all worked additional voluntary overtime.  They also volunteered to be placed on a “standby” and “call out” rota for out-of-hours emergency work.  The claimants were paid for their voluntary overtime and their voluntary standby and call out time, as well receiving a mileage allowance.

"claimants were paid for their voluntary overtime and their voluntary standby and call out time, as well receiving a mileage allowance"

Dudley calculated holiday pay based on contractual hours only – they excluded voluntary overtime, standby and call out payments, and also the mileage allowance.  The claimants brought tribunal claims on the grounds that these additional sums should have been included in their holiday pay. 


The Decision   

Having considered the existing case law in relation to holiday pay and working time (covered above), the employment tribunal decided that the additional payments (including voluntary overtime) had been paid with sufficient regularity to most of the claimants to constitute “normal pay”. 

"additional payments should be included when calculating holiday pay"

As such, these additional payments should be included when calculating holiday pay – but only in respect of the 4 weeks’ leave under the WTD, and not in respect of the extra 1.6 weeks under the WTR or any additional contractual leave. 


Comment

Although this latest decision is not binding on other tribunals, it’s a useful illustration of the direction that these holiday pay cases are following.  

With this in mind, employers should not rush to adjust the calculation of future holiday payments for workers to include voluntary overtime and the other additional payments, as each case will turn on its’ own facts.

In light of these decisions, it’s probably best to do a proper review of current working arrangements to establish what constitutes a worker’s “normal remuneration”, and could therefore be included in holiday pay. 

"it’s probably best to do a proper review of current working arrangements to establish what constitutes a worker’s normal remuneration”

These holiday pay cases will continue and employers should wait until we have more clarity from the higher courts.  However, it ultimately rests with parliament to change the WTR to make clear what should (and should not) be included in the calculation of holiday pay. 

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