The Employment Appeal Tribunal in Dudley Metropolitan Borough Council v Willetts has recently held that voluntary overtime pay should be taken into account when calculating holiday pay for 4 weeks of a worker's holiday.
The EU Working Time Directive (“the WTD”) provides workers with a statutory right to 4 weeks’ annual paid leave. There is no guidance in the WTD as to how this holiday pay should be calculated, but it has been interpreted as having to include “normal remuneration”.
In the case of Williams and others v British Airways plc the European court of Justice (“ECJ”) held that remuneration which is “intrinsically linked to the performance of the tasks which [a worker] is required to carry out under his contract of employment and in respect of which a monetary amount, included in the calculation of his total remuneration, is provided” must be taken into account when calculating holiday pay.
The Employment Appeal Tribunal (EAT) provided further guidance in the case of Bear Scotland v Fulton and others, deciding that compulsory overtime, which a worker is obliged to carry out if requested by their employer, should be included as part of their “normal remuneration”. However, it did not clarify the position on voluntary overtime.
This case involved five employees who brought a claim on behalf of 56 employees. They all worked for Dudley Metropolitan Borough Council (“the Council”) repairing and maintaining council houses. They were contracted to work 37 hours a week but volunteered, usually for one week in every four or five weeks, to perform additional duties that were not required under their contracts. These included working voluntary overtime, as well as participating in on-call rotas and working out-of-hours standby shifts.
The Council did not take into account the payments in respect of the voluntary additional work or overtime when calculating holiday pay and the employees brought a claim against the Council for unlawful deduction of wages.
Their claim was successful at the first instance Employment Tribunal and the Council then appealed to the EAT.
The EAT dismissed the Council’s appeal, agreeing with the Employment Tribunal that the voluntary overtime, on-call allowances and out-of-hours payments were paid with sufficient regularity to be considered “normal remuneration”.
The EAT referred to both the Williams and Bear Scotland decisions, including the test in Bear Scotland that “normal pay is that which is normally received”. The EAT in this case held that for a payment to be considered “normal”, it must have been paid over a sufficient period of time on a regular or recurring basis, which is a question of fact and degree. Here it was held that overtime worked one week in every four or five weeks was sufficiently regular.
Part of the EAT’s reasoning behind this decision was the risk that treating pay for voluntary work differently could resulting in different components of pay being created. These could then potentially be used by employers to minimise holiday pay by setting a lower basic salary and paying voluntary overtime on top instead. This in turn would deter workers from taking holiday, which the WTD seeks to prevent.
Although there is a possibility the Council will appeal this decision, the case does provide some additional legal certainty in relation to the issue of voluntary overtime, which was left unresolved in the Bear Scotland decision. However, neither case provides any detailed guidance to employers on how regularly overtime must be paid in order for it to amount to normal remuneration. Further case law on this point will likely emerge in the future.
It is also important to note that this decision only applies to the first 4 weeks’ of holiday pay under the WTD, and not the additional 1.6 weeks’ holiday pay that workers are entitled to under the Working Time Regulations 1998 in the UK. However, the case potentially has significant implications for certain employers as voluntary overtime is the most common form of overtime.
Employers paying voluntary overtime or other forms of voluntary payments, such as call-out allowance and out-of-hours payments, will need to consider adjusting their payroll schemes to ensure that they are calculating holiday pay correctly moving forward. They should also anticipate an increased risk of claims being brought relating to underpayment of holiday, particularly given the recent decision that tribunal fees are unlawful and no longer have to be paid.
However, there should be limited scope for backdated claims as employees can only claim unpaid wages (including holiday pay) for up to two years. In addition, following the decision in Bear Scotland, where claims are brought as a chain of non-payments, the chain will be broken by a period of 3 months or more between each unlawful deduction. Such claims may therefore be limited to the current holiday year in some cases.