News & Insights

Voluntary overtime – A compulsory entitlement for holiday pay

Ian Machray reports on the Employment Appeal Tribunal decision which confirmed that regular voluntary overtime should be reflected in holiday pay.

The EU Working Time Directive (WTD), under which UK workers derive four weeks’ holiday, stipulates that holiday pay must reflect a worker’s normal pay. A body of case law has confirmed that this includes certain payments over and above basic salary. In a recent case, the Employment Appeal Tribunal (EAT) went further and considered whether payments and allowances for purely voluntary overtime should also be reflected in holiday pay.

This case involved unlawful deductions from wages claims brought by 56 employees who worked a set number of hours each week under their employment contracts. In addition, they were on an on call register once in every four to five weeks, and worked additional hours at their discretion. They claimed that their holiday pay should have included pay and allowances for overtime even though the additional hours were entirely voluntary. This argument succeeded in the Employment Tribunal (ET) which concluded that overtime should have been reflected in the holiday pay of those employees who regularly undertook additional work. The Council appealed to the EAT, arguing that regular voluntary overtime did not amount to normal remuneration for the purposes of the WTD.

The EAT rejected the appeal, finding that the ET were entitled to conclude that payments for overtime fell within the employees’ normal pay. They clarified that, for a payment to constitute normal remuneration, it must be paid on a regular or recurring basis over a significant period of time. The additional overtime, albeit purely voluntary, was carried out on a sufficiently regular basis and to deny the employees this pay would potentially deter them from taking their holiday entitlement. As a word of caution, the EAT noted that what amounts to a sufficient period of time is a question of fact requiring assessment on a case by case basis.

Although this decision may leave employers vulnerable to claims for underpayment of holiday pay, the risk of back-dated claims is reduced as workers cannot claim they have suffered an unlawful deduction from wages where there has been a gap of three months or more between any underpayment. It is important to reiterate that this decision applies exclusively to the first four weeks’ holiday under the WTD and does not include purely ad hoc or irregular overtime.

Whilst many employers have adopted a hesitant approach to holiday pay calculations, this case serves as a prompt to implement processes to ensure employees receive accurate holiday pay.