Could your business be exposed to holiday pay claims?

In the recent case of Dudley Metropolitan Borough Council v Willetts and others, UKEAT/0334/1 the EAT has decided that regular payments for voluntary overtime should be taken into account when calculating employee’s holiday pay.

56 employees brought a claim that they had not received the correct rate of holiday pay arguing that it should include voluntary overtime, standby pay and call out pay. The employees worked regular contractual hours but then volunteered to perform additional duties which were not required under their contract. They also participated in on call rotas for which they were paid a stand-by allowance, plus call out and mileage payments if they were actually called upon to do work whilst on standby. The Employer had no right to enforce overtime work and the employees could jump on and off rotas whenever they wished.

After an Employment Tribunal found for the employees, Dudley appealed. The EAT dismissed the appeal, concluding that for the majority of the employees the allowances were paid in such a manner and with sufficient regularity to be considered normal remuneration. In doing so they were mindful that, once added to the rota, the employee was required to attend work if called upon and therefore the payments were designed to reimburse the employee for their inconvenience. The EAT therefore concluded that this work was intrinsically linked to normal tasks undertaken under the contract of employment.

The Working Time Regulations 1998 provides workers with the right to a minimum of 5.6 weeks paid annual leave. How the rate of holiday pay is calculated has given rise to a number of recent high profile decisions. The legal position is that holiday pay should be calculated according to “normal remuneration” which should include “remuneration which is intrinsically linked to the performance of tasks which the employee is required to carry out under their contract”. In recent EAT cases such ‘normal remuneration’ has been found to extend to sales commission, various allowances or weightings, guaranteed overtime and non-guaranteed but compulsory overtime (where overtime is not guaranteed but must be worked if offered).

Although the now well-known ‘Bear Scotland’ cases decided at first instance that purely voluntary overtime should be included in a holiday calculation (Fulton and another v Bear Scotland Ltd ETS/4112472/12) there has been no decision in the higher courts until Dudley.

It is clear that the direction of travel in the courts is to minimise any financial detriment to an employee who wishes to take annual leave. It is important for employers to note, however, that employees can only bring claims for deductions from wages related to holiday going back 2 years, and to even do this, there must be a series of deductions with gaps of no more than 3 months between each deduction. This means that if there is a gap of more than 3 months between annual leave payments, the employee is unlikely to be able to claim for losses any further back. These decisions also only apply to the first 4 weeks annual holiday granted to UK workers under the Working Time Directive and not the additional 1.6 weeks which was introduced by domestic legislation.

If your business is concerned about its exposure in the light of this decision, we can help to assess the risk, the level of exposure, and devise a strategy to minimise any commercial impact.