Latest decision on holiday pay - regular voluntary overtime payments to be included

The Employment Appeal Tribunal (EAT) has clarified that regular voluntary overtime payments form part of normal remuneration and should be included in the calculation of holiday pay for the purposes of the four weeks' minimum annual leave entitlement required by EU law.(1)

Background

The Employment Tribunal previously decided that regular voluntary overtime payments should be included in the calculation of holiday pay(2) and the EAT has now upheld this decision. This means that regular voluntary overtime payments – together with out-of-hours standby pay, call out allowances and mileage or travel allowances linked to these categories – should be included in the calculation of holiday pay for the purposes of the four weeks' minimum annual leave entitlement required by EU law, irrespective of whether the obligation to perform the work was included in the employment contract.

The overarching principle that holiday pay should correspond to normal remuneration so that workers are not discouraged from taking leave was established by the European Court of Justice in Williams v British Airways. In order for a payment to amount to normal remuneration, subsequent case law has reinforced the need for an intrinsic link between the payment and performance of tasks that the worker must carry out under the employment contract. For voluntary overtime, the respondent argued that this necessary link was missing because voluntary overtime was not performed or required under the contract, but rather involved a separate agreement between the parties.

Decision

The EAT decided that the respondent's argument placed too much emphasis on what was required by the employment contract. Once an employee had volunteered for overtime and was on the rota, he or she was required to work if needed. As a result, the payments associated with performing that work were intrinsically linked to the work required under the contract. However, the EAT considered that while an intrinsic link was one way to establish that pay amounted to normal remuneration, the absence of such a link did not automatically exclude a payment from counting towards holiday pay.

The respondent also argued that there was a distinction between payments made for overtime work done every week or most weeks and overtime work done in only a minority of weeks, even if that overtime was worked regularly. On this basis, it argued that 'normal' does not equate to 'regular' and payments could be regular without being normal. In line with previous case law, the EAT acknowledged that for payments to count as 'normal', they must have been paid over a sufficient period and that this will be a question of fact and degree. However, it saw no difficulty in concluding that a payment which was made in a minority of weeks in the year (eg, every four or five weeks, as in this case) could be considered normal.

The EAT was clearly mindful of the consequences of reaching a different decision. It highlighted that excluding pay for voluntary overtime normally worked would be too narrow an interpretation of remuneration and would carry with it the risk of workers suffering financial disadvantage, deterring them from exercising their right to annual leave. This was a particular concern in light of the increase in zero-hour contracts. A different decision could incentivise some employers to set a low level of basic hours, leaving additional hours as 'voluntary' hours which need not be accounted for in calculating paid holiday, even if they were regularly worked.

Comment

This decision is the first appellate case in which the arguments over whether voluntary overtime should be included in the calculation of holiday pay have been fully argued. According to the EAT, the question – irrespective of the label put on the payment and the source of the obligation to perform the work – is whether the payment forms part of the worker's normal remuneration. The answer will be fact specific in each case, but there is now binding authority that where a worker regularly undertakes voluntary overtime, those payments will generally form part of normal remuneration and should be factored into the calculation of holiday pay. In light of this, employers should review their overtime arrangements and approach to calculating holiday pay, and – if appropriate – consider options for changing practices to ensure compliance with this decision.

Whether the workers in this case had suffered loss as a result of taking leave will be decided at an Employment Tribunal remedy hearing.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.