Appeal Tribunal Result Changes Holiday Pay and Overtime
Cecily Donoghue, employment solicitor at Gregg Latchams, reports on the Employment Appeal Tribunal’s finding that regular payments for voluntary overtime must be included in the calculation of holiday pay.
What has happened?
Fifty six Quick Response Operatives worked for Dudley Metropolitan Borough Council as electricians, plumbers and roofers. They also worked voluntary overtime and could volunteer to join a standby rota for out-of-hours emergency work. This overtime was entirely voluntary and they were paid: out of hours standby, call out allowance, voluntary overtime and mileage allowance. The Council calculated the operatives’ holiday pay based on core contractual hours only and did not include any of the additional payments above as the Council did not determine these to be contractual pay.
The operatives brought a claim for unlawful deductions of wages and the Tribunal found in their favour holding that voluntary standby, voluntary call out, and voluntary overtime should be included in the calculation of holiday pay where the payments have become part of the employee’s normal pay.
The Tribunal determined that holiday pay should include the allowances as they were paid in such a manner and with sufficient regularity to be considered as “normal remuneration”. The Tribunal followed the principles established in previous cases that a worker should not be deterred from taking annual leave (the ECJ in British Airways v Williams) and that “normal pay” is pay “normally received” (the EAT in Bear Scotland v Fulton).
The Council appealed, arguing that the work was not intrinsically linked to the performance of tasks under the employment contract as it was voluntary overtime. The EAT rejected the appeal, and upheld the original Tribunal’s decision.
What was the EAT decision?
The EAT held that to exclude such payments from holiday pay would result in a financial disadvantage to workers which deters (or might deter) them from taking annual leave. The EAT also found a clear link between the payments and the performance of their duties because when they were working overtime, the operatives were performing the same tasks as set out in their employment contracts. The judgment provides a detailed analysis of the factors in question and sets out a number of helpful conclusions:
- The right to paid annual leave is a particularly important principle of EU social law and the Working Time Directive cannot derogate from this.
- EU law requires that normal (not contractual) remuneration must be maintained in respect of the four week period of annual leave.
- In accordance with the Working Time Directive, there is no distinction between contractual work and extra work which is voluntarily undertaken.
- The overarching principle is that payments should correspond to the “normal remuneration received by the worker” whilst working.
- In each case, the relevant element of pay should be assessed in light of this overarching principle and to maintain normal remuneration so that holiday pay corresponds to remuneration whilst working.
- For a payment to count as “normal” it must have been paid over a sufficient period of time. This will be a question of fact and degree. Items which are not usually paid or are exceptional do not count.
- The test for “normal remuneration” is not solely dependent on a link between pay and the performance of duties – this is a decisive criterion but not the only factor. If there is an intrinsic link between the payment and the performance of tasks required under the contract then it passes the test and falls within normal remuneration.
What does this mean for you?
This case reflects the general direction of travel and the increasing number of elements of pay that must now be included in the calculation of holiday pay. The original Tribunal acknowledged that it was “sailing into unchartered waters”, but the EAT’s decision provides helpful clarity on a significant area of work for many sectors.
Whether or not an element of pay should be included in the calculation of holiday pay is determined by considering whether the payment forms part of the worker’s “normal remuneration” – this is so regardless of name the employer applies to the payment. Following this binding decision, regular voluntary overtime should be included in the calculation of holiday pay. Please note, however, that this applies to the calculation of the first four weeks of annual leave under the Working Time Regulations 1998. The remaining 1.6 weeks (or any additional contractual holiday) can be paid at basic pay.
Advice for clients
If your business operates in an environment where voluntary overtime is regularly worked by your staff, we recommend that you speak to either Cecily Donoghue or Nick Jones in our employment team for advice on any change that may have to be made and how to manage liabilities for past payments that may now be considered due.