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Calculating holiday pay: voluntary overtime payments must be included in holiday pay

08 September 2017

A recent Employment Appeal Tribunal (EAT) decision (Dudley Metropolitan Borough Council v Willets and others) held that voluntary overtime that is normally worked should be included when calculating a worker’s holiday pay.

The overarching principle when it comes to calculating holiday pay is that workers should not be worse off in terms of remuneration when on holiday and thereby be discouraged from taking leave. Holiday pay should, therefore, correspond to a worker’s ‘normal remuneration.’

The decision in Dudley has now provided some clarity on what should be included in the calculation of ‘normal remuneration’ and therefore holiday pay.

Calculating holiday pay

In addition to basic salary, ‘normal remuneration’ should include payments which are ‘intrinsically linked’ to the performance of duties under a contract of employment. This would ordinarily include overtime pay, commission and bonuses but, prior to the decision in Dudley, it was unclear whether voluntary overtime would also be included.

The decision in Dudley

The employees in Dudley had set contractual normal working hours but also had the option of volunteering for additional hours. It was up to the employees whether they wanted to perform additional work and/or participate in an on call rota. The employees only worked overtime every four to five weeks; remuneration for those additional hours was not included in their holiday pay.

The EAT held that voluntary overtime, standby allowances and call-out payments should be included in holiday pay because such payments were sufficiently regular and extended over a sufficient period of time to amount to normal remuneration.

In previous case law the decisive factor in determining whether payments should be included in calculating ‘normal remuneration’ was whether such remuneration was ‘intrinsically linked’ to the performance of  the employee’s contractual duties. However, in Dudley it was held that additional remuneration may have to be included even if such an intrinsic link is not present, broadening the scope of payments which might have to be included.

Practical steps: what should be included going forward?

It is worth noting that the decision only applies to the four weeks’ holiday under the WTD and does not impact the additional 1.6 weeks of holiday provided for under domestic law.

Ultimately, whether voluntary overtime payments are to be included in the calculation of holiday pay will be a question of fact and degree, rarely worked overtime would not need to be included. However, following the guidance from the EAT, it is important for employers to review their practices to ensure that sufficiently regular and recurring voluntary overtime payments and other payments that are usually paid and regular are included in the calculation of holiday pay.

Further guidance from the tribunals will be needed in order to establish with some certainty whether voluntary overtime and other similar payments  are ‘sufficiently regular’ to be included in a worker’s holiday pay.  In the meantime, however, employers should consider the payments to workers in respect of voluntary overtime and other similar payments and the impact of including such payments, will have on their business.

If you want to discuss any issues around holiday pay, please get in contact with a member of the Employment Group.

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