Back in summer 2017, the Employment Appeal Tribunal (EAT) made a ruling that changed the way holiday payments are calculated for employees that regularly work overtime – creating a headache for practice managers in the process. In a nutshell, the ruling decided that employers must include any regular voluntary overtime payments when they work out holiday pay for their staff.

While this initially might seem straightforward enough, the ruling has raised plenty of questions – which we’ll answer in this article.

What is the ruling?

Through the ruling, European courts essentially decided that holiday pay (pay during annual leave) must reflect “normal remuneration” – which they say includes ‘regular’ overtime. This, the lawmakers said, is because where overtime has become an intrinsic part of their jobs and pay, it should be recognised. Occasional overtime need not be factored in.

However, it’s worth noting that this ruling only applies to the first four weeks of holiday pay. That’s because this equals the amount of annual leave that the EU Working Time Directive requires employers to give to employees and workers.

While UK law does grant workers and employees an additional 1.6 weeks’ holiday, this 1.6 weeks doesn’t have to include voluntary overtime. It’s at the discretion of practices whether or not they cover all holiday.

What does ‘regular’ overtime mean?

The ruling states that holiday pay must be calculated on the basis of the employee’s normal pay. Where an employee normally works overtime, this should be included in the calculation of their holiday pay.

What isn’t detailed is a definition setting out how regularly overtime must be worked for it to be included, but the general principle is that pay that is “normally received” should be included in holiday pay. This is clearly a grey area.

Does any guidance exist?

In the case of White v Others v Dudley Metropolitan Borough Council in 2016, a judge concluded that voluntary overtime, voluntary standby, and voluntary call-out payments should be considered ‘normal’ pay if undertaken with ‘sufficient regularity’, and should, therefore, be used when calculating holiday pay.

Dudley Council appealed and in August 2017 the EAT confirmed that voluntary overtime was ‘normal’ where it’s paid over a sufficient period of time on a regular basis. The EAT found that payments made over several years at a rate of one week in every four-to-five weeks was sufficiently regular.

The EAT in this case also appeared to endorse a 12-week reference period to calculate holidays (as previously thought).

Regular overtime has nothing to do with whether it’s worked weekly or not. The key, therefore, is that if an employee has worked a settled pattern of overtime over a period of time, payment for that overtime is pay that they normally receive and must therefore be included in holiday pay. Where there is no settled pattern of overtime, the employer should calculate average pay over a reference period leading up to the period of annual leave, although the courts have not addressed what a suitable reference period would be. Most practices that we spoke to work out overtime across a rolling 12- or 13-week period prior to the holiday period.

More discussion on this point can be found in this Practice Index Forum discussion.

What is normal non-guaranteed overtime?

Okay, so this is overtime that you haven’t guaranteed to your employees in their contract, but if you require it of them, they have to work it.

The Employment Appeal Tribunal (EAT) held that regular overtime that is not guaranteed, but that employees are required to work when it is offered, must also be included.

What if employees are volunteering for overtime?

This is a topic recently covered by the Court of Appeal, which addressed the question of whether or not overtime that is voluntary must be included in the calculation of holiday pay. It held that voluntary overtime must be included if it is part of a pattern of work that is sufficiently regular and settled for payments made in respect of it to amount to normal remuneration. This will be for tribunals to decide on the facts of each case, but practices should draw up a policy of how they calculate this – again, a 12- or 13-week rolling pattern may work well.

If my practice is giving TOIL, do I still have to pay the additional holiday pay?

According to ACAS – and correctly shared by a practice manager on the Forum thread mentioned above, TOIL isn’t covered by this ruling as the additional hours the employee works are taken back: their ‘usual’ income isn’t affected.

This isn’t law is it? – why should I do this?

The important point here is that it is case law – rulings set a precedent – and therefore it’s good practice to work to the ruling listed above.

This is another case of UK and European case law constantly evolving – and further evolution is likely to happen.

What will happen after Brexit?

The honest answer is nobody knows! But it’s unlikely any major changes to law will take place in the short-term – the most likely change is that it will default to the UK’s 5.6 week leave entitlement. Until they do, this case law is the one to stick to.

How should an employee claim for underpaid holiday?

An employee needs to bring a tribunal claim within three months of the underpayment.

So, if you underpaid your employee in June, they have until the same date in September to make their claim.

Does this apply to practice managers?

Yes, of course – the rule applies to every employee who works regular overtime.

The final point to make is that if you have no normal working hours, then holiday pay is calculated by using the preceding 12 weeks of pay.

What help is available?

Practice Index has developed a ‘Holiday overtime pay calculator’, designed specifically to help practice managers work out entitlement with minimal effort and input. The only information you need is:

• How much holiday the employee has already used
• Their usual weekly hours
• Their regular weekly overtime amount
• Their rate of pay
• The handy calculator will do the rest for you.

More information on the toolkit and how it works can be found here.

Have you been affected by the overtime holiday pay ruling? How are you dealing with the case law? Let us know by commenting below or share your views on the Practice Index Forum.

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