EAT: voluntary overtime payments must be included in calculation of holiday pay

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The EAT has given judgment in the case of Dudley Metropolitan Borough Council v Willetts and Others, deciding that the calculation of holiday pay for the four weeks’ holiday guaranteed under the EU Working Time Directive must include payments for voluntary overtime where these form part of the worker’s "normal remuneration".

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Legal Background

Under the Working Time Regulations (WTR), workers are entitled to 5.6 weeks’ statutory holiday made up of:

  • 4 weeks’ EU entitlement (Euroleave) derived from the Working Time Directive (WTD); and
  • 1.6 weeks’ UK entitlement.

Many companies also provide contractual holiday on top of the minimum statutory amount.

Whilst contractual holiday can be paid at any agreed rate, the WTR provide that each of the 5.6 weeks’ statutory holiday must be paid at the rate of a "week’s pay" as defined in the Employment Rights Act 1996 (ERA).

However, case law has now established that the use of the ERA definition of a "week’s pay" for the purposes of calculating Euroleave pay is incompatible with the requirements of the WTD.

The leading EU law case on holiday pay is Williams v British Airways, in which the Court of Justice of the European Union (CJEU) decided that certain allowances paid to pilots should be included in their holiday pay, and that the pilots must receive "normal remuneration" for statutory holidays. "Normal remuneration" should, according to the CJEU, ensure that workers on holiday are in a position comparable in terms of pay to when they are working normally.

Following the Williams case, the UK courts and tribunals have accepted in various cases that the calculation of pay for Euroleave should include compulsory, guaranteed and non-guaranteed overtime, as well as commission payments which form part of a worker’s "normal remuneration".

However, the question of whether payments for overtime that is entirely voluntary must also be included when calculating pay for Euroleave remained unanswered. Giving judgment in Dudley Metropolitan Borough Council v Willetts and Others, the EAT has now addressed this issue.

Factual Background

Mr Willetts was one of a group of workers employed by Dudley Metropolitan Borough Council (the MBC) to carry out repairs and improvements to its housing stock (e.g. to plumbing, electrics, building maintenance, etc).

The MBC had calculated holiday pay based on basic pay only, but Mr Willetts and his colleagues claimed that their holiday pay entitlement for periods of Euroleave should also take into account out-of-hours standby pay, call out allowance, voluntary overtime and mileage or travel allowance linked to the above.

Mr Willetts’ and his colleagues had set contractual hours but also volunteered to perform additional duties which they were not required to carry out under their contracts of employment. An employment tribunal (ET) found that on-call and additional overtime work was entirely voluntary in the sense that Mr Willetts and his colleagues could drop on and off the rotas to suit themselves, and additional work of that nature was "almost entirely at the whim of the employee, with no right to enforce work on the part of the employer". The ET held that those payments should nevertheless be included in the calculation of holiday pay.

The MBC appealed to the EAT.

EAT judgment

The EAT began by highlighting that the right to paid annual leave is regarded by the CJEU as a particularly important principle of EU social law, and that EU law requires that normal (not contractual) remuneration must be maintained in respect of the 4 weeks’ holiday under the WTD; payments for periods of holiday should "correspond to the normal remuneration received by the worker" while working, so as to make sure that a worker is not financially disadvantaged by – and thus deterred from – taking holiday.

The EAT noted that for a payment to count as "normal" it must have been paid over a sufficient period of time and this would be a question of fact and degree. The frequency and regularity of a payment would be relevant in deciding whether or not it is "normal". Those elements of pay which are not usually paid or which are exceptional do not count, but elements which are usually paid and regular across time may do so. Fluctuations in the amount paid from week to week could be catered for in the process of averaging the holiday pay calculation over a (12 week) reference period.

Rejecting an argument made by the MBC, the EAT decided that there did not necessarily have to be a link between a payment and the performance of duties required under the employment contract in order for that payment to form part of "normal remuneration". Clearly, where such a link does exist, that will be decisive and the payment must form part of normal remuneration. However, while it is a decisive criterion, it is not the only decisive criterion – as demonstrated by the fact that payments for seniority, length of service and professional qualifications can also count as normal remuneration even though the link with contractual duties is not present in respect of those payments.

According to the EAT, it would be wrong to exclude pay for voluntary work which is normally undertaken from the concept of normal remuneration as a matter of principle. To do so would give rise to the risk that employers could fragment pay into multiple elements in an attempt to minimise levels of holiday pay – for example, by setting artificially low levels of basic contracted hours and categorising the remaining working time as "voluntary overtime" which would not have to be accounted for in respect of paid holiday. The financial disadvantage that workers would suffer as a result might deter them from taking their holiday, contrary to the underlying objective of the WTD. The EAT considered this was "not a fanciful but a real objection" to the MBC’s argument, as demonstrated by the current "proliferation of zero hours contracts".

Furthermore, even if an intrinsic link between the payment and the performance of tasks required under the contract was a condition of "normal remuneration", the EAT considered that this test was satisfied in respect of voluntary overtime payments. A specific agreement for voluntary overtime can only exist against the background of a contract of employment. Whatever the position in advance of a particular shift, once a worker begins working a shift of voluntary overtime or a standby duty or callout, they are performing tasks required of them under their contract of employment even if there is also a separate agreement or arrangement. Once those shifts have begun they are in no different position from a worker who is required by his contract to work overtime, to be on standby, or to attend callouts.

Finally, the EAT rejected the MBC’s argument that where workers had the opportunity to take their holiday in weeks where the rota required no overtime or out-of-hours shifts, that meant that they were not deterred from taking holiday by the failure to include within normal remuneration pay for such overtime or out-of-hours shifts. A deterrent effect is inferred from a reduction in pay rather than from actual evidence that a worker has not taken holiday.

Comment

EEF has advised for some time that voluntary overtime that is worked "normally" should probably be included in the calculation of pay for Euroleave, and, given the direction of travel in the case law, the EAT’s decision in this case is unsurprising. It is now beyond doubt that the calculation of pay for Euroleave should include commission payments, compulsory, guaranteed and non-guaranteed overtime, as well as voluntary overtime which forms part of a worker’s "normal remuneration". While there may still be some debate over what degree of regularity is required for a payment to be "normal", including a payment that is sufficiently occasional that it might not have to be included is unlikely to increase an employer’s costs very significantly. For employers who haven’t yet adjusted their holiday pay calculations to comply with the case law, there is now little point in putting it off any longer.

Acting now to ensure that holiday pay is calculated correctly going forwards can also help to curtail any past liability, since recent case law has confirmed that, where there is more than a 3 month gap in a series of unlawful deductions from wages, the series is effectively broken and claims cannot be made for deductions before the gap

It is important to note, of course, that the case law requirement that holiday pay should correspond to "normal remuneration" only applies to the 4 weeks’ Euroleave guaranteed by the WTD. The additional 1.6 week UK holiday entitlement can still be calculated using the "week’s pay" calculations under the ERA without adjustment, while any additional contractual holiday can be paid on whatever basis is agreed in the worker’s contract.

How EEF can help

The administration of and inter-relationship between Euroleave, UK holiday entitlement and additional contractual holiday can be challenging for employers. EEF is experienced in advising companies on strategic decisions, such as: striking a balance between the administrative ease of calculating all holiday pay in the same way and the cost implications of increasing all holiday pay to correspond to "normal remuneration"; and determining the most compliant approach for employers in practice, taking into account any constraints that might be imposed by their pay periods and payroll systems.

EEF members looking for guidance on any issues around workers’ holiday entitlements can refer to the relevant 'Holiday entitlement and pay' page in the Knowledge and Resources section of our website, and contact their normal adviser for further assistance.

Author

Senior Legal Adviser

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