In July 2017, the Employment Appeal Tribunal (EAT) dismissed an appeal by Dudley Metropolitan Borough Council, ruling that voluntary overtime should be included in calculations for holiday pay.
The case, Dudley Metropolitan Borough Council v Mr G. Willetts and others, was originally brought to the Employment Tribunal (ET) by 56 council employees who work as electricians, plumbers, roofers, storemen, operations officers and quick response operatives. They contended that the pay they received for performing additional duties on a voluntary basis, as well as the travel time linked to this work, should be taken into account for holiday pay calculations. This is to ensure that they are not financially disadvantaged by taking leave.
These additional duties, which are scheduled entirely by the employees, includes out-of-hours standby shifts, attending call-outs, and voluntary overtime. The employees in question are formally contracted to work for 37 hours a week, with many also having a contractual right to work two to four hours of overtime. The voluntary duties are performed in addition to these normal working hours.
The ET ruled in favour of the claimants, and although the council appealed the decision, the EAT upheld the ET’s verdict and dismissed the appeal. The EAT found that there was no distinction between contracted working hours and voluntarily worked shifts under the European Union’s Working Time Directive because normal remuneration has to be maintained for the calculation of holiday pay, which relates to the statutory four weeks of annual leave provided under EU law.
The EAT found that if voluntary shifts and other additional duties performed on a voluntary basis formed part of normal pay, then this should be included in holiday pay calculations to avoid any financial disadvantages that could occur from an employee opting to take leave rather than working.
How the ruling could impact employers
Although the ruling has clarified the situation around voluntary overtime being included in holiday pay, it has failed to address the practicalities that employers need to consider to action changes in their organisations, said Stefan Martin, partner at law firm Hogan Lovells. “They’ve left a couple of questions outstanding, which is what is a normal payment? When will it qualify? That is something the courts are still going to have to interpret. […] [The case] doesn’t really answer the practical questions that would need to be worked through,” he added.
For example, the reference period for calculating holiday pay has raised question marks for many employers, said Kate Hodgkiss, employment partner at DLA Piper. “The case is quite clear that it doesn’t need to be a fixed period, or the same amount on a weekly or a monthly basis, it just needs to be with a degree of regularity as to amount to normal remuneration,” she said. This could cause complexities for employers who regularly hire staff for nine months of the year, for example, or who have employees who only perform overtime in certain months, such as in the run up to Christmas or over the summer holidays.
Hodgkiss added: “Do they calculate it at the point of time when the overtime is worked or do they choose a longer reference period and calculate it at the end of the year so that they’re essentially recompensing employees for when they took holiday earlier in the year? Those types of practical problems are the ones that employers really need to face because otherwise they’ll need to change the whole payroll system in order to adjust.”
In light of the ruling, the first step for employers should be to conduct an audit on employee pay and remuneration, including what voluntary overtime might qualify as normal pay for the purposes of holiday pay. Then, employers should consider the reference period they are going to use to calculate holiday pay. This might involve counting back 12 weeks from the first day of the holiday and averaging out what the employee’s pay is during that period, taking into account overtime, whether it is compulsory or regular voluntary overtime, explained Simon Kerr-Davis, employment counsel at Linklaters.
“It would be good to see some positive steps forward to come up with a solution that both protects employees but also makes things administratively straightforward for employers to know where they stand as well,” Kerr-Davis added.