News & Events

EAT rules that voluntary overtime payments must be included in holiday pay

Submitted By Firm: Addleshaw Goddard

Contact(s): Michael Leftley, Sarah Harrop

Author(s):

Amanda Steadman

Date Published: 11/13/2017

Article Type:

Share This:

The EAT has upheld a Tribunal decision that voluntary overtime, stand-by and call out payments must be reflected in holiday pay, provided such payments amount to "normal remuneration".  Importantly, the EAT held that the worker does not have to be contractually obliged to carry out the work in order for the related payment to be included in holiday pay (Dudley Metropolitan Borough Council v Willetts and others).

Background

Under Article 7 of the Working Time Directive (WTD), EU Member States must ensure that workers have the right to at least 4 weeks' paid annual leave. The WTD is implemented into UK law by the Working Time Regulations (WTR). The WTR provides workers with 5.6 weeks' annual leave, of which 4 weeks' is derived from the WTD.

Workers are entitled to be paid at the rate of a "week's pay" for each week of leave, calculated in accordance with sections 221 to 224 of the Employment Rights Act 1996. For workers with normal working hours, a "week's pay" includes basic salary, but excludes payments for commission and overtime.  Although the WTD does not specify how statutory holiday pay should be calculated, European case law suggested that the UK's approach to calculating annual leave wass insufficient. For example:

  • In Williams and others v British Airways plc (2011) (Williams), the ECJ ruled that "workers must receive their normal remuneration for that period of rest". The ECJ expanded on the concept of "normal remuneration" to hold that a worker on holiday is entitled not only to basic salary, but also to any aspect of pay which is "linked intrinsically to the performance of the tasks which he is required to carry out under his contract of employment". This opened the door for workers with normal working hours to seek to include other components of pay in their holiday pay.
  • In Lock v British Gas Trading Limited (2014) (Lock), the ECJ held that where a worker was paid commission calculated on the basis of the sale that he had made, that commission must also be included.

In November 2014, in the combined cases of Bear Scotland Ltd v Fulton and Baxter; Hertel (UK) Ltd v Wood and others; and Amex Group Ltd v Law and others (Bear Scotland), the Employment Appeal Tribunal (EAT) held that non-guaranteed but compulsory overtime should be included in holiday pay provided that it was "normal remuneration".  However, the EAT did not make any findings in relation to purely voluntary overtime, because the issue was not engaged in any of the cases in question.

This decision is the first appellate decision on the question of voluntary overtime.

Facts

The 56 claimants were employed by Dudley Metropolitan Borough Council (Dudley) as tradesman involved in the repair and maintenance of Dudley's housing stock. The claimants had fixed contractual working hours (a few also worked a some additional hours of compulsory and guaranteed overtime). All of the claimants worked additional voluntary overtime. They also volunteered to be placed on a "standby" and "call out" rota for out-of-hours emergency work. The claimants were paid for their voluntary overtime and their voluntary standby and call out time. They also received a mileage allowance.

Dudley calculated holiday pay based on contractual hours only. They excluded the voluntary overtime, standby and call out payments and also the mileage allowance. The claimants brought Tribunal claims arguing that these additional sums should have been included in their holiday pay.

Employment Tribunal decision

The Tribunal decided that in some cases the additional payments had been paid with sufficient regularity that they were part of the claimants' normal pay. However, it is worth noting that voluntary overtime was not considered to be normal pay for one lead claimant where it was performed only rarely.

Where the payments were normal pay, the Tribunal concluded that they should be included in holiday pay in respect of the 20 days' annual leave arising under the WTD. The additional payments did not have to be included in holiday pay in respect of: (i) the additional 8 days' arising under the WTR; or (ii) any additional contractual entitlement. Following the EAT's obiter comments in Bear Scotland, the Tribunal also held that workers accrued their WTD leave before the additional WTR leave.

EAT decision

Dudley appealed to the EAT (where the lead claimant changed from Mr Brettle to Mr Willetts).  They argued that voluntary overtime payments (and other payments) should not count as "normal remuneration" because the necessary "intrinsic link" to the performance of the contractual tasks was missing.  It was argued that voluntary overtime was not performed under the contract of employment but by reference to a separate agreement between the parties.

Dismissing the appeal, the EAT Judge held that the overarching principle was that normal - not contractual - remuneration must be paid during the annual leave guaranteed by Article 7 of the WTD.  In Williams the presence of an intrinsic link between the payments and the performance of tasks under the contract meant that they had to be treated as normal remuneration.   However, the decision in Williams reflected the ECJ's assessment of the specific payments at issue in that case and was only one example of a decisive criterion of normal remuneration – it was not the only decisive criterion.

The EAT Judge noted that: "The absence of such as intrinsic link does not automatically exclude such a payment from counting".  And later in the judgment: "The question in every case, irrespective of the label put on the payment, is whether the payment forms part of the worker's normal remuneration.  If payments for voluntary shifts, standby or callout payments are normally paid, they must be included in pay for holiday leave"

However, the EAT Judge also said that if she was wrong on this and an intrinsic link was required, then that test would have been satisfied here because:

  • whenever a claimant was working a period of voluntary overtime they were performing tasks required of them under their contracts of employment (even if there was also a separate agreement);

 

  • the payments made were all directly linked to the tasks they were required to perform under their contracts; and

 

  • once a period of voluntary overtime had begun the claimants were in no different position to an employee working compulsory overtime.

The EAT Judge said it would be for the fact-finding tribunal to determine whether the payments were sufficiently regular and settled as to amount to normal remuneration.  Although the decision did not extend to what reference period should be used in calculating holiday pay in such circumstances, the Judge did remark that: "Fluctuations in the amount paid would be catered for by the 12 week average".

Comment

This is the first appellate decision on the inclusion of voluntary overtime payments in holiday pay.  Does this mean that employers should adjust the calculation of holiday pay to include voluntary overtime payments if they have not already done so?  Absent a further appeal, this decision is binding and employers should consider adjusting holiday pay.  However, uncertainties remain as to how such an adjustment should be effected.

First, it is not clear what reference period should be used to calculate holiday pay.  Is a 12-week reference period appropriate (as is used for workers without normal pay), or would a longer reference period be more suitable in certain cases given the need to comply with overarching principle of paying normal pay?  In the absence of any guidance from the Tribunals or the Government, employers will have to make their own judgement on what reference period to use. In this context, it is worth noting that the recently-published Taylor Review recommended the use of longer reference periods for workers with irregular hours.  However, it is unclear if, or when, this proposal will be taken forward.

Second, uncertainty remains as to when a payment is considered to be paid regularly over a sufficient period of time to warrant inclusion in holiday pay.  The EAT Judge suggested a payment once every four or five weeks would meet the threshold if paid over a sufficient period of time.  But how irregular does a payment have to be to fall out of scope (e.g. is once a year, every year, regular or irregular)?  Again, employers will have to make their own judgement on whether a payment is in or out of scope.

Where a decision is taken to adjust the calculation of holiday pay it should be remembered that these payments only strictly need to be included for WTD-derived holiday (i.e. 20 days per year for a full time worker) and not the additional WTR-derived holiday (i.e. 8 days per year for a full time worker).  However, some employers may opt to make the changes on a wholesale basis on the grounds of administrative simplicity.

Further, if the UK leaves the EU and does not have to comply with EU working time laws, it is possible that the Government will rewrite the WTR to provide that holiday pay should be basic pay only.  Therefore, employers may wish to preserve a degree of flexibility by reserving the right to adjust the calculation of holiday pay in accordance with applicable law.

Dudley Metropolitan Borough Council v Willetts and others

Find a Member

View or print a complete ELA member list »

Client Successes

Altra Industrial Motion Inc.

Altra Industrial Motion Inc. has multiple locations in the U.S., as well as Central America, Europe, and Asia. The Employment Law Alliance has proved to be a great asset in assisting us in dealing with employment issues and matters in such diverse venues as Mexico, Australia, and Spain. We have obtained excellent results using the ELA network for matters ranging from a multi-state review of employment policies to assisting with individual employment issues in a variety of foreign jurisdictions.

In one instance, we were faced with an employment dispute with a former associate in Mexico that had the potential for substantial economic exposure. The matter had been pending for over a year, and we were not confident in the employment advice we had been receiving. I obtained a referral to the ELA counsel in Mexico, who was able to obtain a favorable resolution of the dispute in only a few days. Based on our experiences with the ELA, we would not hesitate to use its many resources for future employment law needs.

American University in Bulgaria

In my career I have been a practicing attorney, counsel to the Governor of Maine, and CEO of a major public utility. I have worked with many lawyers in many settings. When the American University in Bulgaria needed help with employment litigation in federal court in Syracuse, New York, we turned to Pierce Atwood, the ELA member we knew and trusted in Maine, for a referral. We were extremely pleased with the responsiveness and high quality of service we received from Bond Schoeneck & King, the ELA's firm in upstate New York. I would not hesitate to recommend the ELA to any employer.

David T. Flanagan
Member of Board of Trustees 

Arcata Associates

I really enjoyed the Conducting an Effective Internal Investigation in the United States webinar.  We are in the midst of a rather delicate employee relations issue in California right now and the discussion helped me tremendously.  It also reinforced things that you tend to forget if you don't do these investigations frequently.  So, many, many thanks to the Employment Law Alliance for putting that webinar together.  It was extremely beneficial.

Lynn Clayton
Vice President, Human Resources

Barrett Business Services, Inc.

I recently participated in the ELA-sponsored webinar on the Employee Free Choice Act.  I was most impressed with that presentation.  It was extremely helpful and very worthwhile.  I have also been utilizing the ELA's online Global Employer Handbook.  This compliance tool is absolutely terrific. 

I am familiar with several other products that purport to provide up-to- date employment law information and I believe that this resource is superior to other similar compliance manuals.  I am delighted that the ELA provides this free to its members' clients.

Boyd Coffee Company

Employment Law Alliance (ELA) has provided Boyd Coffee Company with a highly valued connection to resources, important information and learning. With complex operations and employees working in approximately 20 states, we are continually striving to keep abreast of specific state laws, many of which vary from state to state. We have participated in the ELA web seminars and have found the content very useful. We appreciate the ease, cost effectiveness and quality of the content and presenters offered by these web seminars.  The Global Employer Handbook has provided our company with a very helpful overview of legal issues in the various states in which we operate, and the network of attorneys has helped us manage issues that have arisen in states other than where our Roastery and corporate headquarters are located in Portland, Oregon.

Capgemini Outsourcing Services GmbH

As an international operating outsourcing and consulting supplier Capgemini has used firms of the Employment Law Alliance in Central Europe. We were always highly satisfied with the quality of employment law advice and the responsiveness. I can really recommend the ELA lawyers.

Hirschfeld Kraemer

Stephen HirschfeldAs an employment lawyer based in San Francisco, I work closely with high tech clients with operations around the globe. Last year, one of my clients needed to implement a workforce reduction in a dozen countries simultaneously. And they gave me 48 hours to accomplish this. I don't know how I could have pulled this off without the resources of the ELA. I don't know of any single law firm that could have made this happen. My client received all of the help they needed in a timely fashion and on a cost effective basis.

Stephen J. Hirschfeld
Partner 

Hollywood Entertainment Corporation

As the Vice President for Litigation & Associate General Counsel for my company, I need to ensure that we have a team of top-notch employment lawyers in place in every jurisdiction where we do business. And I want to be confident that those lawyers know our business so they don't have to reinvent the wheel when a new legal matter arises. With more than 3400 stores and 35,000 employees operating in all 50 U.S. states and across Canada, we rely on the ELA to partner with us to help accomplish our objectives. I have been delighted with the consistent high quality of the work performed by ELA lawyers. I encourage other in-house counsel to use their services, as well.

Ingram Micro

Ingram Micro is the world's largest technology distributor, providing sales, marketing, and logistics services for the IT industry around the globe. With over 13,000 employees working throughout the U.S. and in 35 international countries, we need employment lawyers who we can count on to ensure global legal compliance. Our experience with many multi-state and multi-national law firms is that their employment law services are not always a high priority for them, and many do not have experts in many of their offices. The ELA has assembled an excellent team of highly skilled employment lawyers, wherever and whenever I need them, and they have proven to be an invaluable resource to our company.

Konami Gaming

Our company, Konami Gaming, Inc., is growing rapidly in a very diverse and highly regulated industry. We are aggressively entering new markets outside the domestic U.S., including Canada and South America. I have had the recent opportunity to utilize the services provided by the ELA. The legal advice was both responsive and professional. Most of all, the entire process was seamless since our Nevada attorney coordinated the services and legal advice requested. I look forward to working with the ELA in the future, as it serves as a great resource to the legal community.

Jennifer Martinez
Vice President, Human Resources

Nikkiso Cryo, Inc.

Until recently, I was unaware of the ELA's existence. We have subsidiaries and affiliates throughout the United States, as well as in Asia, the Middle East and Europe. When a recent legal issue arose in Texas, our long-time Nevada counsel, who is a member of the ELA, suggested that this matter be handled by his ELA colleague in Dallas. We are very pleased with the quality and timeliness of services provided by that firm, and we are excited to now have the ELA as an important asset to help us address employment law issues worldwide.

Palm, Inc.

The ELA network has been immensely important to our company in helping us address an array of human resources challenges around the world. I strongly encourage H.R. executives who have employees located in many different jurisdictions to utilize the ELA's unparalleled expertise and geographic coverage.

Stacy Murphy
Former Senior Director of Human Resources

Rich Products

As the General Counsel for a company with 6,500 employees operating across the U.S. and in eight countries, it is critical that I have top quality lawyers on the ground where we do business. The ELA is an indispensable resource. It has taken the guesswork out of finding the best employment counsel wherever we have a problem.

Jill K. Bond
Senior Vice President/General Counsel, Shared Services and Benefits

Ricoh Americas Corporation

We have direct sales and service offices all over the U.S., but have not necessarily had the need in the past for assistance with legal work in every state where we have a business presence. From time to time, we suddenly find ourselves facing a legal issue in a state where we have no outside counsel relationship. It has been a real benefit to know that the ELA has assembled such an impressive team of experts throughout the U.S. and overseas.

A few years ago, we faced a very tough discrimination lawsuit in Mississippi. We had never had to retain a lawyer there before. I was absolutely delighted with the Mississippi ELA firm. We received an excellent result. They will no doubt handle all of our employment law matters in Mississippi in the future. I have also obtained the assistance of several other ELA firms around the U.S. and have received the same outstanding service. The ELA is a tremendous resource for our company.

Roberts-Gordon LLC

Our affiliated companies have used the Employment Law Alliance in connection with numerous acquisitions, and have always been extremely pleased with our ability to obtain the highest quality legal advice on due diligence issues from jurisdiction to jurisdiction. We have found the Employment Law Alliance firms to be not only first rate with respect to their legal advice but also responsive and timely in assisting us with federal and state law issues critical to our due diligence efforts. We consider the Employment Law Alliance to be an important part of our team.

Rockwell Collins, Inc.

We have partnered with many ELA firms on the development and execution of case management strategies with very positive results. We have been very pleased with the legal advice and counsel provided by the law firms we have utilized who are affiliated with the Employment Law Alliance. The ELA firms we have worked with are customer focused, responsive, and thorough in their approach to handling labor and employment law matters.

Elizabeth Daly
Assistant General Counsel

Sanmina-SCI

Sanmina-SCI has facilities strategically located in key regions throughout the world. Our customers expect that we will provide them with the highest quality and most sophisticated services in the marketplace. We have that same expectation for the lawyers with whom we do business. With operations in 17 countries, we need to be certain that we have a team of lawyers working together to address our employment law needs worldwide. The ELA has delivered exactly what it promised-- seamless and consistent high quality services delivered in each locale around the globe. It has quickly become a key asset for our human resources department.

Starwood

We own, manage, and franchise hotels throughout the U.S. and in more than 90 countries. With more than 145,000 employees worldwide, ensuring that we comply with the complex web of local labor and employment laws in every one of these jurisdictions is a daunting task. The Employment Law Alliance has served as an important resource for us and we have benefited greatly from its expertise and long reach. When a legal dispute or issue has arisen in some far-flung place, Employment Law Alliance lawyers have always provided responsive, practical, and cost-effective assistance.

Wilmington Trust Corporation

Wilmington Trust has used the ELA to locate firms in California, Washington State, Georgia, and Europe. Our experience with the ELA lawyers with whom we have worked has always been one of complete satisfaction and prompt, practical advice.

Michael A. DiGregorio
General Counsel