Voluntary overtime and holiday pay calculations
01 October 2019
This article was featured in the October 2019 issue of the magazine.
Danny Done, managing director at Portfolio Payroll, discusses recent landmark rulings
Employment law states that holiday pay should be equivalent to a normal week’s pay so as not to place employees at a financial detriment when taking a period of annual leave. This means holiday pay calculations are rather straightforward when it relates to employees who work a fixed number of hours each week.
However, calculations naturally become more complicated when it comes to those who work varying hours. In these situations, employers must calculate the overall average working time in the twelve weeks immediately prior to taking annual leave. If there is a week during this period where no work occurred, then the calculation must take into account an earlier week where work did take place.
There are also additional factors to take into account where overtime is concerned and a recent landmark ruling by the Court of Appeal (‘the Court’), in the case of East of England Ambulance NHS Trust v Flowers, has created more responsibilities for employers in terms of factoring voluntary overtime into holiday pay.
The claimants in this case each worked as part of the ambulance service and took part in non-guaranteed overtime which was required as part of their contract, and voluntary overtime that they were not required to work but could do if they wished. They brought proceedings for unlawful deduction of wages against their employer, as both forms of overtime were not included in calculations for their holiday pay.
Whilst the dispute over non-guaranteed overtime was settled at the Employment Appeal Tribunal (EAT), the Trust decided to appeal the inclusion of voluntary overtime with the Court. However, the Court dismissed their appeal and confirmed that voluntary overtime will need to be included in holiday pay calculations when it is “sufficiently regular and settled”.
...‘voluntary’ now joins ‘compulsory’ and ‘non-guaranteed’ overtime in future holiday pay calculations...
Unfortunately, further guidance was not provided on how to determine when voluntary overtime qualifies as ‘sufficiently regular’ or ‘settled’ and this will depend upon the facts of each case, such as the frequency of the overtime and how long it has been done for.
Nevertheless, this decision will now become the binding case law that employers must refer to for any future disputes relating to voluntary overtime and holiday pay. Therefore, it is recommended that employers review existing methods of recording overtime shifts and ensure payroll include these in calculations going forward. Having said this, the decision could still be appealed to the Supreme Court, so some employers may be inclined to continue withholding voluntary overtime from holiday pay until further legal clarification is provided.
This ruling confirms, for now, that ‘voluntary’ now joins ‘compulsory’ and ‘non-guaranteed’ overtime in future holiday pay calculations. Compulsory overtime, which employers are contractually obliged to offer and employees are obliged to accept, has long been included in these calculations. The requirement to include non-guaranteed overtime is fairly recent in comparison, following the 2014 ruling in the case Bear Scotland v Fulton. The EAT in this case found that overtime which employers have no obligation to offer, but cannot be refused by employees when it is, should be included in holiday pay where it forms part of an employee’s normal remuneration.
Employees who receive results-based commission are also entitled to have this included in their holiday pay calculations as per the ruling in British Gas Trading v Lock. However, payments must relate to an employee’s individual performance, as opposed to any team-based reward. The same principle applies for any other regular payments that can be intrinsically linked to the role.
It is important to note that, aside from compulsory overtime, all other forms of overtime will only apply to the four weeks of annual leave provided by the EU Working Time Directive. This is not required for the additional 1.6 weeks that is provided as a minimum under UK law. It is therefore essential that employers consider this when working out holiday pay calculations to avoid over- or underpaying staff.
Ultimately, the Court’s decision on voluntary overtime follows the ongoing trend of increasing the protections afforded to those whose wages may fluctuate from one pay period to the next. Employers that provide this type of overtime may need to reconsider how regularly it is offered in the future, given the additional cost involved, and ensure the correct structure is in place to calculate holiday pay.