Ruling on overtime payments reflected in holiday pay | KPMG | UK

Regular voluntary overtime payments to be reflected in holiday pay

Ruling on overtime payments reflected in holiday pay

The Employment Appeal Tribunal (EAT) rules that regular voluntary overtime payments must be included in the calculation of statutory holiday pay.

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In the latest instalment of a long series of holiday pay cases, the EAT has increased the scope of what pay components must be included in statutory holiday pay calculations to now include regular voluntary overtime payments.

While this case is good news for workers who regularly work voluntary overtime, this will present an additional cost and operational burden for some employers.

What’s the issue?

Employees and workers have a right to be paid for their statutory holiday pay. There has been considerable uncertainty as to how that holiday pay should be calculated. Both UK and European case law has been evolving and while that evolution has been in favour of employees and workers, it has nevertheless lead to significant uncertainty.

To date, case law has established that contractual overtime, non-guaranteed overtime and commission, must be included in the holiday pay calculation. It was only a matter of time before the Courts also considered the treatment of voluntary overtime.

What does the EAT’s decision say?

In Dudley Metropolitan Borough Council v Willetts and others, the EAT held that where regular payments for voluntary overtime are made to workers, these have to be taken into account in calculating those workers’ holiday pay. This is on the basis that holiday pay must correspond to ‘normal remuneration’ so that it does not discourage workers from taking leave.

So, what is ‘normal’? For a payment to count as ‘normal’, the EAT says that it must be paid over a sufficient period of time (which will be a fact specific consideration). A further decisive (but not exclusive) factor in considering what is ‘normal’, is whether there is an intrinsic link between the payment and the performance of tasks required under the contract.

Dudley Metropolitan Borough Council employed a number of tradesmen ("Claimants") on fixed contractual working hours who also 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, voluntary standby and call out time as well as receiving a mileage allowance.

Holiday pay was calculated based on contractual hours only. The Council excluded voluntary overtime, standby and call out payments and the mileage allowance from the calculation. The Claimants argued that these additional sums should have been included in their holiday pay.

On appeal from the Employment Tribunal, the EAT decided that the payments for voluntary overtime (as well as call-out, standby and mileage) were made with such sufficient regularity for them to fall within the definition of ‘normal remuneration’.

As such, the EAT concluded they should be included in holiday pay calculation for the 20 days of annual leave arising under the Working Time Directive (but not the additional days provided under the UK Working Time Regulations 1998 or any additional contractual entitlement).

What next for employers?

What this now means for employers is that payment for voluntary duties, such as voluntary overtime, standby, call-out work and travel-time, linked to that work, may need to be included in the calculations of workers' holiday pay, where it is paid so regularly it amounts to ‘normal pay’.

However, unlike the decisions on contractual and guaranteed overtime and commission, the additional complication for employers is that it is less likely to be clear cut whether discretionary overtime is paid so ‘regularly’ it needs to be included in holiday pay calculations. Where there is a degree of interpretation needed, it is likely that differences of opinion as to what exactly needs to be included will arise.

The EAT has helped in stating its decision is clear that purely ad hoc or irregular overtime does not need to be included. That is unsurprising and unlikely to give rise to much debate. It also says that it considers this decision only represents a small extension of the principles already established in relation to contractual and non-guaranteed overtime, as well as commission. That is much more debatable.

The net result is that Employment Tribunals will inevitably continue to hear arguments about whether overtime (of whatever nature) has become part of an employee's normal pay. Employers should take steps now to review all their overtime arrangements and prepare a strategy to deal with any historic risks and look ahead to mitigate future liabilities.

Finally, it is worth noting the position remains that employees who have a break of more than 3 months between underpayments of holiday pay, will not be able to (successfully) argue they have suffered a series of unlawful deductions. Also that any claims for a series of deductions can only go back two years from the last deduction. This may mitigate the risk and potential cost arising from this decision.

Next Steps

If you have any queries, please do not hesitate to get in touch with your normal contact or e-mail employersclub@kpmg.co.uk

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