The calculation of holiday pay can be a stressful task for employers, particularly where they have employees who work irregular hours or overtime.
A recent Employment Appeal Tribunal decision has given further clarity about calculating holiday pay.
The decision has confirmed that employees who regularly work voluntary overtime should in some cases have their overtime payments included in the calculation of their holiday pay.
This decision was first reached by the Employment Tribunal back in September 2016, but it is not until now that the decision has received the stamp of approval from the Employment Appeal Tribunal, and so is binding on future Tribunal decisions.
In the case of Willets v Dudley Metropolitan Borough Council, a group of employees were employed by Dudley Council to carry out repair and improvement work across various council properties.
These employees carried out overtime work for Dudley Council which was entirely voluntary, as the Council had no right to enforce the employees to work this overtime. Rather, as the Employment Tribunal put it, the extra work was "entirely at the whim of the employee".
Dudley Council's argument in this case was based on past decisions of the European Court, which held that voluntary overtime payments should not count as "normal remuneration" because there is no intrinsic link between the payments and the performance of tasks required under the contract of employment.
The employees argued instead that not including voluntary overtime payments in the calculation of holiday pay goes against the general intention of the Working Time Directive, which was that holiday pay should equate to the "normal remuneration" that an employee receives in order not to be discouraged from taking annual leave (because doing so would put them at a financial disadvantage).
The employees also argued that there is (in any case) a link between their voluntary overtime payments and the performance of duties under the contracts, because, when carrying out the overtime work, they are still performing the same tasks as required under their contracts.
The Appeal Tribunal found in favour of the employees in this case.
The fact that the overtime was voluntary was held not to matter, as the Employment Appeal Tribunal pointed out that the Working Time Directive does not establish a clear test for determining "normal remuneration" which is dependent on there being a link between the overtime payments and the performance of duties required under the employee's contract.
In fact, the Employment Appeal Tribunal found that, even if there was a need for there to be an intrinsic link between the payments and the performance of duties, this test would in any case have been satisfied, for the reasons put forward by the employees.
Crucially, the employees had shown that they carried out the voluntary overtime work on a regular basis, in some cases over a period of quite a few years. The Employment Appeal Tribunal held that not including these payments in the calculation of their holiday pay might therefore deter them from taking holiday - which would be contrary to the intention of the Working Time Directive.
Although this sets a precedent for there being some cases where voluntary overtime should be included in the calculation of holiday pay, it is important to note that each case will be assessed by a Tribunal on its own facts to determine whether the overtime in question is being paid regularly enough over a sufficient period of time to amount to "normal remuneration".
In light of the judgment, we would suggest that you:
- review the way in which you calculate holiday pay;
- if you pay any of your employees voluntary overtime, consider whether these payments being made regularly, and over a number of months or years; and
- be aware of the possibility of employees claiming back unpaid holiday pay, in the event that any employees consider that they should have been entitled to a higher rate of holiday pay due to their voluntary overtime. We can assist with the defence of such claims, which are subject to complex time limitation rules.