Last reviewed 14 August 2019

With a recent Court of Appeal case clarifying how employers should take account of voluntary overtime when carrying out holiday pay calculations, we take a look at how this affects employers when paying staff for their holiday leave.

The background

The right to annual leave in the UK is enshrined in the EU’s Working Time Directive. Article 7 requires Member States to take necessary measures to ensure every worker is entitled to “paid annual leave of at least four weeks” which may not be paid in lieu, except in circumstances where the employment ends. Domestic provisions are contained in the Working Time Regulations 1998, as amended, which extended the annual leave entitlement to the current right to take 5.6 weeks’ leave.

Without further guidance on the approach to “paid” leave from the EU, a number of cases have been argued regarding whether additional payments received alongside basic remuneration should be included within holiday pay. These cases have included the right to receive shift payments for British Airways workers (British Airways plc v Noble [2006] EWCA Civ 537) and the right to receive contractual commission payments, following a decision by the European Court of Justice (ECJ) which confirmed these should be included (Lock v British Gas Trading UKEAT/0189/15}.

In most cases, the inclusion of additional payments has centred on the idea of “normal remuneration”. Originally confirmed by the ECJ in Williams and others v British Airways plc [2011] EUECJ C-155/10, workers should receive holiday pay which amounts to their “normal remuneration” as if they had remained at work during the period, with domestic courts deciding what pay provisions will amount to normal pay. The purpose behind this is to ensure that workers are not placed at a financial detriment by going on holiday, because this would create circumstances where they are penalised and deterred from taking their annual leave entitlement in the first place.

In recent years, a number of cases have considered the requirement to include overtime in holiday pay. With it quickly being confirmed that contractual or “non-guaranteed overtime” will amount to normal remuneration (see Bear Scotland Ltd v Fulton and another UKEATS/0047/13), there has been confusion over where voluntary overtime stands.

The issue with voluntary overtime

As the name itself suggests, voluntary overtime does not form part of an employee’s contractual obligations and there are usually no controls in place over how much voluntary overtime is carried out by a worker, subject to the normal working time restrictions and rights. Therefore, employers can often find themselves in a situation where an employee is working significant amounts of voluntary overtime, and receiving greater than expected pay, either as a one-off or over a regular period of time. Where an employee simply puts their name down against any shifts they want to work, for whatever personal or professional reason, employers argued that they should not have to take these payments into account for holiday pay due to the lack of obligation on employees to work it.

In the earliest persuasive decision, the Northern Ireland Court of Appeal reiterated that there was no particular reason why voluntary overtime should not be considered as part of “normal remuneration” if it was normally carried out (Patterson v Castlereagh Borough Council [2015] NICA 47).

Perhaps unsurprisingly, the domestic tribunals considering these case have also followed the EU’s notion of providing “normal remuneration” during EU periods of holiday leave. Recently, the Court of Appeal has confirmed that where voluntary overtime is sufficiently settled and regular, this should be classed as “normal remuneration” and taken into account when calculating holiday pay. Going forwards, all employment tribunals and appeal tribunals will be bound to follow the Court of Appeal’s decision in Flowers v East of England Ambulance Trust [2019] EWCA Civ 947.

What does this mean for holiday pay?

Subject to an alternative decision by the Supreme Court, if such an appeal arises, the position now is that voluntary overtime which is sufficiently settled and regular must be taken into account in holiday payments for the first four weeks of holiday leave, as provided for by the EU Directive. The difficulty, however, is that no previous cases have confirmed exactly when voluntary overtime will be classed as “regular” and “settled”. This creates difficulties for employers who wish to ensure their holiday payments are lawful, and also employees who may start challenging the level of their holiday remuneration.

It now falls to employers to review their internal voluntary overtime working practices and how these may relate to their calculation of holiday pay. They will need to consider how to handle the determination of regular and settled, whether this is on the basis of whether:

  • voluntary overtime pay is included in each pay packet

  • voluntary overtime is carried out in every overtime rota period

  • voluntary overtime is worked by an employee at the same interval, eg one day every two weeks

  • ad hoc overtime worked has no set pattern but is considered sufficiently regular

  • voluntary overtime is worked within the 12-week period before holiday leave.

Where the employer deems this overtime to be sufficiently regular and settled, it will have to ensure its holiday pay calculation processes are updated to take account of the payments received for this additional work. Further care will have to be taken, however, to ensure that the additional pay is only received for the four-week EU holiday leave, as there is currently no requirement to include voluntary overtime payments in the additional domestic 1.6 weeks’ leave. Employers may find it useful to explain the reason for different holiday payments to their employees, as this could prevent additional queries or complaints being received about this.

As the Working Time Regulations have not yet been updated, employers who fail to take account of voluntary overtime in holiday pay will not breach the law, but this practice will be challengeable at the employment tribunal. Should a tribunal claim be brought, they will be bound to follow the Court of Appeal’s decision which requires any settled and regular voluntary overtime pay to be considered. As most employers are aware, tribunal claim numbers are significantly high due to the ever-increasing challenges from employees who believe they have been unfairly treated, so taking steps to ensure holiday pay calculations are in line with binding case law will help address any complaints or claims.