Correct calculation of holiday pay continues to be a difficult issue, resulting in a number of employment claims for arrears of pay.

The latest decision from the Employment Appeals Tribunal (‘EAT’) in Dudley Metropolitan Borough Council v Willetts, found that voluntary overtime must be taken into account when calculating holiday pay. The Working Time Regulations stipulate that holiday pay must correspond to ‘normal remuneration’. Normal remuneration has been found to include commission (Lock v British Gas) and non-guaranteed overtime payments (Bear Scotland).

The EAT found that for a payment to count as ‘normal’, it must have been paid over a sufficient period of time. This requires an assessment of the pay and benefits the employee has received. Items which are not usually paid or are exceptional are unlikely to be included in holiday pay calculations, while items that are regularly paid may be included. If there is an intrinsic link between the payment and the performance of tasks required under the contract, this indicates whether it is included within normal remuneration.

In this particular case, a group of 56 employees who were responsible for housing repairs for the Council claimed that they had not received the correct rate of statutory holiday pay. Almost all worked 37 hours per week, but they also volunteered to perform additional duties which their contracts of employment did not require them to carry out. This work was purely voluntary and the Council was unable to force staff to carry out that work. The employees argued that their holiday pay should reflect voluntary overtime, call-out payments and mileage and standby allowances.

The original tribunal concluded that the standby allowances should be included because they were paid so regularly to be considered normal pay. They justified this decision on the principle that a worker should not be deterred financially from taking annual leave.

On reviewing the voluntary overtime, although participation in the standby rota was voluntary, once an employee’s name was on the rota he or she was required to attend work if called upon. The call-out payment was intended to reimburse the employee for undertaking inconvenient out-of-hours work. The tribunal found it was therefore linked to work carried out under the employment contract.

The tribunal also decided that the portion of the mileage allowance that was taxable as a benefit in kind was part of the employees’ normal pay and should count towards their statutory holiday pay. The Council appealed to the EAT.

The EAT dismissed the appeal and held that the tribunal made no error of law in finding that voluntary overtime pay was paid with sufficient regularity to amount to normal pay. In any event, the overtime arrangement would not have existed without a contract of employment in place. The duties carried out in overtime were sufficiently similar to tasks carried out under their usual contractual hours. It was therefore an appropriate decision that these payments should be included when calculating holiday pay.

Employers are advised to review their holiday pay calculations and consider whether regular overtime payments (whether voluntary or not) are already included. If not, they may be at risk from claims for arrears of pay, for holiday taken within the last three months and potentially up to two years ago.

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