Latest decision on holiday pay - regular voluntary overtime payments to be included

The background facts of this case can be found in our report on the Employment Tribunal’s (“ET”) decision here.  The ET decided that regular voluntary overtime payments should be included in the calculation of holiday pay and the EAT has now upheld this decision.  This means that regular voluntary overtime payments (together with out-of-hours standby pay, call out allowances and mileage or travel allowance linked to these categories) should be included in the calculation of holiday pay for the purposes of the four weeks’ minimum annual leave entitlement required by EU law, irrespective of whether the obligation to perform the work was in the employment contract or not.

The overarching principle that holiday pay should correspond to “normal remuneration” so that workers are not discouraged from taking leave was established by the ECJ in Williams v British Airways. In order for a payment to amount to “normal remuneration”, subsequent case law has reinforced the need for an intrinsic link between the payment and the performance of tasks that the worker is required to carry out under the contract of employment.  For voluntary overtime, the Council argued that this necessary link was missing because voluntary overtime was not performed or required under the contract but involved a separate agreement between the parties.

The EAT decided that the Council’s argument placed too much emphasis on what was required by the contract.  Once an employee had volunteered for overtime and was on the rota, they were required to work if needed.  As a result, the payments associated with performing that work were intrinsically linked to the work required under the contract.  Interestingly, however, the EAT considered that while an intrinsic link was one way to establish that pay amounted to “normal remuneration”, the absence of such a link did not automatically exclude a payment from counting towards holiday pay.

The Council also argued that there was a distinction between payments made for overtime work done every week or most weeks, and payments in respect of overtime work done only in a minority of weeks, even if that overtime was worked regularly.  On this basis, the Council argued that “normal” does not equate to “regular” and payments could be “regular” without being “normal”.  In line with previous case law, the EAT acknowledged that for payments to count as “normal”, they must have been paid over a sufficient period of time and that this will be a question of fact and degree.  However, the EAT saw no difficulty with concluding that a payment which was made in a ‘minority’ of weeks in the year (for example every four or five weeks, as in this case) could be considered “normal”. 

It is clear that the EAT was mindful of the consequences of reaching a different decision.  It highlighted that excluding pay for voluntary overtime normally worked would be too narrow an interpretation of remuneration and would carry with it the risk of a worker suffering financial disadvantage, deterring them from exercising their right to annual leave.  This was a particular concern for the EAT in light of the increased use of zero hours contracts.  A different decision could incentivise some employers to set a low level of basic hours, leaving additional hours as ‘voluntary’ hours which would not need to be accounted for in calculating paid holiday even if they were regularly worked. 

This decision is the first appellate case in which the arguments about whether voluntary overtime should be included in the calculation of holiday pay have been fully argued.  According to the EAT, the question (irrespective of the label put on the payment and irrespective of the source of the obligation to perform the work) is: does the payment form part of the worker’s normal remuneration?  The answer will be fact specific in each case but there is now binding authority that where a worker regularly undertakes voluntary overtime, those payments will generally form part of normal remuneration and should be factored into the calculation of holiday pay.  In light of this, employers should review their overtime arrangements and their current approach to calculating holiday pay and, if appropriate, consider options for changing practices to ensure compliance with this decision.

Whether the workers in this case had in fact suffered loss as a result of taking leave will be decided at a future ET remedy hearing.  The full judgment of the EAT can be accessed here.