HM Insights

The inclusion of voluntary overtime in holiday pay calculations

What's been happening?

As we reported last month, there had been some English first instance tribunal decisions which indicated that voluntary overtime should constitute normal remuneration for the purposes of calculating holiday pay under the Working Time legislation.

It was anticipated that one of these decisions, Dudley Metropolitan Borough Council v Willetts UKEAT/0334/16/JOJ, would soon be heard by the Employment Appeal Tribunal and may give binding authority on the question.

Overtime Holiday Pay Employment Law Scotland Lawyer Solicitor Tribunal Appeal Dudley

Binding ruling from the EAT – Voluntary overtime can be 'normal remuneration' to be factored into holiday pay

The EAT judgment has now been handed down in this case, and it upholds the employment tribunal's finding that voluntary overtime may indeed constitute 'normal remuneration' which has to be factored into the computation of holiday pay. The EAT emphasised that workers should receive normal remuneration when they took a holiday, and should not be deterred from taking annual leave due to a pay reduction.

For a payment to count as ‘normal’ it must have been paid over a sufficient period of time. This will be a question of fact and degree. Items which are not usually paid or are exceptional do not count for these purposes. But items that are usually paid and regular across time may do so.

A key element of the question for employers will be whether voluntary overtime extends for a sufficient period of time to justify the description of normal. A payment is to be regarded as "normally" made if paid over a sufficient period of time on a regular or recurring basis.

The worker does not have to be contractually required to carry out overtime for it to be included in normal remuneration. If there is such a contractual requirement then the payment must inevitably be included in computing holiday pay. However, if there is no such contractual requirement, the overtime payments may still require to be factored in, as long as they are sufficiently frequent and enduring to be regarded as 'normal'.

The EAT offered little by way of further guidance on what level of regularity or frequency is required, observing that this will vary on a case-by-case basis, and it will be for employment tribunals to consider the facts and decide whether there is sufficient regularity.

What does this mean for employers?

This case sets a binding precedent which employers will ignore at their peril. Some employers have adopted a "wait and see" approach to the question, delaying action until there was clear judicial authority for the requirement to factor this type of remuneration into the calculation. Given the lack of certainty over what amounts to 'normal pay', employers may need to make a judgement call in the meantime, while the boundaries will no doubt continue to be tested in the tribunals.

Bear in mind: this only relates to the first four weeks' paid holiday, and not to any additional holidays.

How we can help you

We can assist with advising how best to calculate holiday pay, and what pay should be taken into consideration to be compliant. This may be of particular importance bearing in mind the recent Supreme Court decision to abolish Employment Tribunal fees.

Additionally, any current claims in the employment tribunal regarding holiday pay may be affected by this judgment. To discuss how this judgment affects your workplace, please contact one of our employment team.