Voluntary Overtime Counts in Holiday Pay Calculations… Or at least Sometimes

Overtime & “average pay” for holidays has always been a questionable area of employment law: as a worker should not be worse-off financially if they take annual leave, should overtime (voluntary or compulsory) be included in that calculation?

Compulsory overtime was settled previously (this must be paid as part of any calculation into the average weekly wage), but the question of voluntary overtime is new. And today the Employment Appeals Tribunal (EAT) suggested it should count when considering the average pay, the wages that should be paid for a week’s leave.

(To confuse things for payroll departments, these rulings only apply to the 20 days leave that are provided under Regulation 13 of the Working Time Regulations, not any extra leave taken under Regulation 13A, or any extra leave provided contractually.)

The EAT has stated that the focus is on normal remuneration, and not the normal working week. The fact the workers, in the case of Dudley Metropolitan Borough Council v Willets & ors didn’t have to work the overtime, and that this was voluntary, didn’t mean this average of hours worked previously shouldn’t count towards the calculations for regular pay.

A reasonable conclusion from the EAT was that employers could fragment working hours into basic hours, and “voluntary overtime” (paragraph 43), the EAT suggesting this is not a fanciful objection, demonstrated by the proliferation of zero hours contracts. (This option would leave open the idea of offering minimal hours, and regular voluntary overtime, but only the former attracting annual leave – which it’s fair to say, would be against the spirit of the directive.)

While acknowledging that “regular” payments – as in a regular pattern of voluntary overtime having taken being worked, and duly included in the wages – “it will be for the fact-finding employment tribunal to determine whether such overtime is sufficiently regular and settled for payments made to amount to normal remuneration”.

That leaves open a glaring question about a retailer that might extend hours in a busy period (perhaps in the festive season), only to encourage (or require) leave to be taken in the quiet January period.

The judgment from the EAT says that “in principle a payment is normally made if paid over a sufficient period of time on a regular basis” (paragraph 54). But what about an irregular or peak period in the year, not just the past three months (or twelve weeks)?

Would the fact that overtime would not normally be available in January be sufficient to suggest this was not part of the “regular payment”, to discount overtime worked in December? Would the fact that an unusual shortage of staff (at any time of the year), giving rise to offers of voluntary overtime, qualify as “regular”?

Relying solely on sections 221-224 of Employment Rights Act 1996, the regular remuneration would be determined by reference to the previous twelve weeks before the annual leave – and this would now include the voluntary overtime worked. But working on the theory that a pattern of work means there would never be an offer of overtime in January (for a retailer), it’s arguable that the previous 12-week pattern (a peak period for a retailer) would not be adequate to determine “regular”.

For employers of seasonal workers, this judgment is far from clear – it still appears to leave open gaping questions about what exactly is “regular remuneration” – relying on s221-224, Employment Rights Act, while leaving “fact-finding” on whether this is “regular” to an employment tribunal.

And for all employers that offer overtime, the payroll has just got a lot more complicated!

While the judgment (at paragraph 43) recognises that employers could exploit basic contracted hours, there is still no prevention of employers determining when leave is taken: employers are free to decline requests for annual leave at inconvenient, and in theory (in practice too it appears), employers could still decide the timing of annual leave, to ensure these questions simply don’t arise.
This judgment addresses one question – voluntary overtime counts towards average pay – but opens many more (or at least leaves options available for employers to play the system.)

Filed under: Employment Tribunals, General News, Health & Safety, Laws & Regulations by Employment Law Clinic           Post created on: July 31st, 2017