10 August 2017

Holiday Pay and Voluntary Overtime – Binding Decision

Following on from the landmark decision on tribunal fees, we now have a significant development on the calculation of holiday pay. In Dudley Metropolitan Borough Council v Willetts the Employment Appeal Tribunal (EAT) held that voluntary overtime, normally worked, can amount to ‘normal remuneration’ for the purposes of calculating holiday pay. This is the first binding decision on the status of voluntary overtime and it will affect a broad range of employers. On reaching its decision the EAT drew on previous European Court of Justice (ECJ) decisions which emphasised the principle that holiday pay should correspond to “normal remuneration”, so as not to discourage workers from taking their leave.

For a payment to count as “normal”, the EAT held that it must have been paid over a sufficient period of time on a regular and recurring basis. Thus payments for voluntary elements of work (not just overtime) which are made on a sufficiently regular basis should be treated no differently for holiday pay purposes.

What is sufficiently regular?

Normal remuneration is that which is normally received, although unfortunately, the EAT offered little guidance on what level of frequency is required for a payment to qualify as ‘normal remuneration’. In this case, payments made over a number of years at approximately one week in five were held to be sufficiently regular. Employers will have to take a view on whether a payment is regular and how they treat borderline cases.

Does this affect all holiday?

The decision only relates to 20 days leave required under the Working Time Directive and not to additional leave. What is the reference period for calculating average pay?

The ECJ in an earlier case ruled that the reference period should be representative and left it for national courts to determine this. The EAT, in this case, was not asked to address this point, however, they appear to endorse the 12-week reference period set out in the Employment Rights Act 1996.

Many employers have largely adopted a wait and see approach with regard to whether voluntary overtime should be included when calculating holiday pay. However, this is no longer an option as this case has resolved the legal uncertainty. If employers do not take steps to ensure holiday pay is compliant with this ruling, there is an increased likelihood of litigation given the recent abolition of tribunal fees. The ruling may also leave employers vulnerable to claims for underpayment of holiday already taken. It should be noted that employees who have a break of more than three months between payments will not be able to argue that they have suffered a series of deductions, therefore employers’ exposure on backdated claims may be limited. If you would like to discuss the implications of this decision or require advice on any aspect of employment law please contact Tina Maxey on 01328 863231 or email tina.maxey@hayes-storr.com.

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