Overtime: when must it be included in holiday pay?
A recent case, Dudley Council v Willetts, has found that voluntary overtime, standby and callout payments, and part of a travel allowance, should be included in holiday pay if the payments are ‘regular’.
Holiday pay – what we know now
We know that, for the 4 weeks’ EU leave, holiday pay should correspond to an individual’s ‘normal pay’:
Here’s where we are, following case law to date:
What is ‘regular’?
Voluntary overtime which is irregular or exceptional will not count; but payments that are usually paid and regular over time may do.
In Dudley, on the particular facts of that case:
- Rarely worked overtime did not need to be included;
- Voluntary overtime every Saturday should have been included;
- Standby payments, made one week in every four or five, were sufficiently regular to be included.
Is this the end of the debate?
Dudley provides some guidance, but it is difficult for the tribunals to be any more specific about what is ‘regular’ and we may not get a great deal more guidance on this.
What counts as regular will always depend on the particular facts, and drawing the line will not always be straightforward. Your own arrangements may not fall neatly into one category or the other, and may not be consistent throughout the year, or between different teams or individuals within the same team.
Dudley may also be appealed, so this is not necessarily the last word on voluntary overtime. However, it is difficult to envisage a court overturning the principle that regular voluntary overtime should be included in holiday pay.
As per the table above, it is also still not clear whether commission or non-guaranteed compulsory overtime need to be included if they are irregular. However, the direction of travel for the UK courts appears to be that only regular payments need to be included.
Should we amend our holiday pay calculations now?
Despite the practical difficulties, employers may want to tackle this issue. Your options may be to:
- ‘Take the hit’ and just include all overtime in holiday pay; or
- Invest time designing a remuneration system that classifies payments as one-off vs regular. This could of course be subject to a tribunal challenge at some point in the future, but the potential financial savings may outweigh the risk.
Ultimately, whether you should amend your holiday pay arrangements, and if so, how you should go about this, will depend on your circumstances and we would recommend that you take legal advice. If you want to discuss any issues around holiday pay, please get in touch with your usual Brodies contact.
Should we use a 12-week average to calculate holiday pay?
In Dudley, the workers received a standby payment one week in every four or five. If they always took their holidays in ‘non-standby’ weeks, but were paid at a 12-week average rate for the holidays, they Council argued that they would get a windfall. Conversely, if they took holiday in a standby week, they would lose out.
The EAT rejected the Council’s ‘windfall’ argument. Holiday pay can be based on an average over a period that is ‘representative’. A 12-week reference period is commonly used, and the EAT in Dudley appeared to endorse this, although a previous case has suggested that a longer period, such as 12 months, could sometimes be more appropriate.
If, however, you feel that using an average (whether based on 12 weeks or longer) could lead to an unfair result, there may be scope to explore alternatives. In Dudley, for example, it might have been an option for the Council to offer increased holiday pay only if annual leave was taken on what would otherwise have been a standby week. This might not, however, be appropriate or practical in all cases.
The original tribunal in Dudley is still to consider whether any individual worker actually lost out on holiday pay and, if so, how much, so this issue might yet be examined in more detail.
Should we limit additional payments to the 4 weeks’ EU leave?
Other than guaranteed, compulsory overtime (mentioned above), the issue of including overtime, commission or other payments in holiday pay only applies to the 4 weeks’ EU leave, not the additional 1.6 weeks’ UK leave, or contractual leave you offer on top of this.
Whether, administratively, it is practical for you to pay different rates for different periods of holiday, will depend on your circumstances.
If you do limit increased holiday pay to the 4 weeks’ EU leave, it is still not clear which weeks of an individual’s leave this applies to, but arguably it is for you to decide.
Will the holiday pay rules change after Brexit?
According to a recent White Paper, the EU holiday pay cases will still apply post-Brexit, unless the Supreme Court decides otherwise or the government legislates for change. Both are very unlikely, with the White Paper indicating that the government has no appetite to turn back the clock on this issue.
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