Holiday Pay – Voluntary overtime pay is included in holiday pay
What are the implications for employers?
The decision is based on EU law. It therefore only applies to the first four weeks of holiday taken by an employee each year, which is the minimum holiday that EU rules require.
The decision means that where an employee works voluntary overtime and receives additional pay for this, when they subsequently take holiday, employers need to calculate their holiday pay based on both their normal salary and any overtime pay.
Their holiday pay will usually need to be calculated based on their average pay received in the 12 weeks’ leading up to their holiday.
If employers fail to calculate holiday pay correctly going forward they will face potential claims from employees for their correct holiday pay. Employees will also have claims for back pay for the holiday pay they have received in previous months which it now transpires was calculated incorrectly.
Employers should review their holiday pay arrangements and take legal advice to ensure that their current systems are appropriate and they take steps to minimise claims for back pay.
What was the case about?
The case was bought by 56 employees of Dudley Metropolitan Borough Council. They worked in different roles, essentially repairing and improving council housing stock.
They had set hours and pay. In addition, however, they all volunteered to take part in the on-call rota.
They were not obliged to do so, and could ask to drop on and off the rota to suit themselves. They received a call out allowance, overtime pay for time actually worked and travel allowance for this work. These payments were not taken into account in their holiday pay as their employer felt that this was voluntary and therefore not part of their normal pay. They challenged this decision.
The Employment Appeal Tribunal decided that this approach was wrong.
They were concerned that where employees worked on-call regularly, failing to include this in holiday pay calculations would deter employees from taking leave, which goes against one of the fundamental principles of holiday rights.
The Employment Appeal Tribunal felt that employers dividing pay into different elements should not affect employee’s rights to holiday pay. They were also concerned that failing to include voluntary overtime pay could encourage employers to cheat the system by setting artificially low basic hours and then treating remaining hours as “voluntary overtime” that doesn’t get counted for holiday pay. This would be a particular risk with zero hours contracts.
Based on the EU principles that during holiday periods employees should be paid at a rate that is “at least his normal or average remuneration”, they therefore decided that payments for voluntary overtime which are usually paid or are paid for a sufficient period of time on a regular basis to be classed as “normal” should be included in holiday pay.
As ever, the decision is based on the facts. Whether voluntary overtime pay has been paid over a sufficient time period or with sufficient regularity to count as normal is a question of fact and degree for the Employment Tribunal in each case.