Overtime and holiday pay – new rules employers need to know

Luke Green, Employment Partner at Hill Dickinson explains the impact of a new ruling on holiday pay.

Regular voluntary overtime must be included in holiday pay

Many workers will have just received an unexpected boost to their holiday pay, as a result of a recent ruling by the Employment Appeal Tribunal (EAT) that regular voluntary overtime must be included in the first four week’s holiday pay (Dudley Metropolitan Borough Council v Willetts and others).

Employers now need to apply the ruling to their workforces if they wish to avoid possibly costly tribunal claims.

56 workers employed in Dudley MBC’s housing repairs team brought claims arguing that their holiday pay should have included the payments and allowances they received for regular voluntary overtime. Although the EAT has previously ruled that holiday pay should include non-guaranteed overtime which the worker must work at the employer’s request, this was the first time an employment tribunal had been asked to consider whether purely voluntary overtime should be included in holiday pay.

The overtime worked by the Dudley MBC workers was purely voluntary. They could not be forced to work overtime, and could change their minds about whether or not to work it on a day-by-day basis. Some worked voluntary overtime regularly (albeit the amount varied from week to week), whereas some worked it only occasionally.


Is the voluntary overtime so regular that is has become ‘normal’?

The employment tribunal held that the additional overtime payments and allowances did not need to be factored into holiday pay for those employees who only worked voluntary overtime occasionally. However, for those employees who worked voluntary overtime on a regular basis the overtime had become an intrinsic part of their jobs and should have been taken into account when calculating their holiday pay (for the first four weeks’ holiday required under EU law).

The EAT upheld the tribunal’s decision and held that voluntary overtime pay must be included in the first four weeks’ holiday pay if the overtime pattern justifies the description ‘normal’. Tribunals will have to consider each case on its own facts and decide if the overtime pay has become sufficiently regular and settled, so as to require inclusion in holiday pay. However, if the worker works voluntary overtime sufficiently regularly and on a recurring basis over a period of time, then the overtime payments will become part of their ‘normal’ pay, and failure to take them into account may act as a deterrent to the worker taking their holiday entitlement.


What does this mean in practice for employers?

Employers are unlikely to see a rush of back-dated claims, because unlawful deduction from wages claims cannot be brought where there has been a break of more than three months between holiday payments. Further, in most cases these claims are now restricted to two years’ worth of underpayments in any event.

Employers who have not yet made changes to their holiday pay schemes should now consider how best to do so. Although the decision is clear that it only applies to the first four weeks’ of holiday pay (the portion which is required under EU law), in reality most employers will probably apply the ruling to all holiday pay, as the administrative difficulties of operating two holiday pay systems will, in many cases, outweigh the possible cost savings.


Should the Working Time Regulations 1998 be overhauled?

Quite frankly, a review of the Working Time Regulations 1998 is long overdue. This is just the latest in a long line of cases challenging our holiday leave and pay regime. The regulations no longer reflect the true legal position in relation to holiday pay accrual, how holiday pay is calculated, or the carry-over of holiday, and they are therefore very misleading for many employers. We can only hope a thorough overhaul comes soon.

Author: Editorial Team

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