Holiday pay has once again reared its head at tribunal. Long-time readers of our updates will recall that towards the end of 2016 we reported on a case involving Dudley Metropolitan Council, in which the Employment Tribunal (ET) stated that voluntary overtime should be included in the calculation of holiday pay.
As an ET decision, it did not have to be followed in other cases, and the Judge herself noted that the decision took the ET into ‘uncharted waters’. However, an appeal was raised by the Council and the case has now been heard by the Employment Appeal Tribunal (EAT), giving us a more authoritative ruling.
As a recap, the employees in question have normal working hours but also undertake overtime. The overtime is purely voluntary in that the employees are under no obligation to accept any overtime offered. In addition, many of the employees undertake overtime as infrequently as once in every four or five weeks.
At the EAT, the Council’s representative attempted to argue that voluntary overtime should not be included in the calculation of holiday pay as voluntary overtime is not performed under the contract of employment and is in effect a separate agreement between the parties. In short, his argument was that payment should be made only for work that the employees are required to carry out, which would exclude purely voluntary overtime.
The claimants’ representative, Mr Ford, stated instead that the principle of holiday legislation is to ensure that workers enjoy the same remuneration for a period of holiday as they would when at work. Mr Ford also stated that any rule that might disincentivise an employee from taking holiday is incompatible with the Working Time Directive (the European basis for the UK’s laws on holiday). This is of course the reasoning that led to the decisions in Lock v British Gas (in relation to commission) and Fulton v Bear Scotland (in relation to non-voluntary overtime).
Following that trend, the EAT agreed with Mr Ford. It kept to the reasoning that holiday pay should correspond to pay while working and that splitting up pay into different elements (such as basic pay, overtime etc.) should not change that principle.
The EAT also referred to statements made in earlier decisions, namely that treating voluntary overtime differently for holiday pay purposes could lead to employers offering low minimum hours but high amounts of voluntary overtime. The popularity of zero-hours contracts was at the forefront of the EAT’s thoughts in that regard.
Accordingly, the EAT found that regularly worked voluntary overtime should be factored into the calculation of holiday pay. Much of the EAT’s focus was on maintaining ‘normal’ remuneration during holidays. It stated that, in this context, ‘normal’ remuneration included anything paid over a sufficient period of time, as opposed to anything exceptional. It went on to say that there was no need for an intrinsic link between the remuneration and the performance of the duties, and gave as examples pay in relation to seniority or possessing particular qualifications which would also count as normal remuneration.
The EAT also confirmed the finding of the ET in relation to what constitutes ‘regularly worked’ overtime. While it acknowledged that what is ‘regular’ will be different in particular circumstances, it had no difficulty finding that overtime worked only once in every four or five weeks was regular enough to warrant inclusion in the calculation of holiday pay.
The law regarding overtime and holiday pay is arguably pretty much settled, and this case further strengthens that tie in relation to voluntary overtime. However, we are still yet to have a decision on what the reference period should be, i.e. how far back an employer should look when calculating the average overtime paid to employees.
For that reason, as before, employers who operate seasonal overtime may wish to look back up to 12 months to get a true average, whereas those who offer overtime regularly throughout the year may be able to take an average over roughly 12 weeks.
If you have any questions on any of the issues raised in the above article please contact Seanpaul McCahill.