Regular voluntary overtime counts for holiday pay

03 August 2017

Calculating the elements of holiday pay continues to provide challenge and cost for business.

The Employment Appeal Tribunal (EAT) has decided that voluntary overtime should be included in holiday pay calculations where that overtime is so ‘sufficient and regular’ to amount to normal pay. The recent judgement in Dudley Metropolitan Borough Council vs Willetts and others suggests that voluntary overtime worked once in every 5 weeks satisfies this criteria.  

This adds voluntary overtime to both compulsory and non-guaranteed overtime (where a worker is required to work overtime if it is offered to them) to be taken into consideration when calculating holiday pay.  

The overarching principle is that holiday pay should correspond to what the worker is normally paid whilst working.  If it does not, the worker is at a financial disadvantage when taking holiday, deterring the worker from doing so.  This requirement only relates to the 20 days’ holiday a worker is entitled to under EU law and not to the additional 8 days’ statutory holiday entitlement under UK law or to any enhanced contractual holiday entitlement. 

There is still no determination of the reference period to be used for calculating holiday pay. As a bare minimum this should be the 12 weeks immediately preceding the holiday taken but there is nothing to prevent organisations from using a 52 week reference period.  In fact, this was a recommendation recently made by the Taylor review in relation to casual and zero hours workers’ holiday pay calculation.

Workers can make a claim for up to 2 years’ worth of statutory holiday pay.  An appeal from the employer is pending in this EAT case but, with Employment Tribunal fees having been abolished, any employer that does not consider voluntary overtime which is sufficient and regular when calculating holiday pay risks a Tribunal claim and/or building up a substantial holiday pay liability to its workers. 

Given this judgment, we strongly advise employers to start tracking and monitoring the voluntary overtime payments they are making very carefully, if they aren’t already, in order to assess when they become sufficiently regular to constitute normal pay. Employers should complete an audit of overtime practices in order to identify any risk involved; how many workers could argue that they suffer financial detriment when they take a period of holiday?

Additionally, one of the Taylor review’s long term recommendations is to bring enforcement of holiday pay under HMRC’s remit.  The regular stream of cases in this area suggests HMRC will need to be well resourced to undertake this task.