Holiday Pay & Overtime

The latest chapter of the never-ending story of what to pay a worker when they are on a period of annual leave has been written, and the Employment Appeal tribunal (EAT) has been clear in concluding that voluntary over time should be included (in some circumstances) in the calculation of “normal remuneration”, and therefore ought to be paid when that individual takes annual leave (or at least for the first 4 weeks of leave, so as to reflect the entitlement that is provided for by the Working Time Directive (WTD)).

Dudley Metropolitan Borough Council v Willetts and others, is the first binding decision in England and Wales on the issue of voluntary overtime. This case considered employees who were employed across various roles but who all had set hours dictated. In addition to those hours, they were able to dip in and out of a rota which gave them the opportunity to earn extra through on-call supplements and additional overtime, all of which was considered voluntary since they were free to choose whether to take on work to suit themselves.

The Employment Tribunal decision, in the first instance, has been upheld by the EAT and their decision stipulates that for pay to be considered as “normal remuneration”, and therefore included when calculating holiday pay, it must have been paid over a sufficient period of time, be paid regularly, or be paid on a reoccurring basis. This sets an important precedent on the issue of what overtime should be considered when calculating holiday pay, but employers should still consider their position on a case by case basis giving considerations to appropriate factors affecting their workers and work structures.

Previous case law which considered this issue has identified that the calculation of payment during periods of annual leave should take into account contractual requirements which are ‘intrinsically linked to the performance of the required tasks’ but that did not take account of ‘occasional or ancillary costs’. There has been some debate over whether voluntary overtime needed to be considered for the purposes of holiday pay calculations, with many employers viewing it as a chink of light to possibly avoid incurring further costs when it comes to workers taking leave.

Unfortunately, this EAT decision has blacked out that light and moving forward normal remuneration will only disregard payments which are exceptional or not usually paid. Fundamentally the Tribunals have identified that narrow interpretation of “normal remuneration” only serves to put workers at a financial disadvantage and as such deters them from taking holiday.

To that end, if there is payment made over a sufficient period of time, on a regular basis, say for one week each month or one week in every five weeks, even if it is not paid more frequently or even each week, then it ought to be factored in.