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Should holiday pay be calculated including voluntary overtime?

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Holiday pay has featured heavily in the news over the last year but until now the question of all overtime (both compulsory and voluntary) worked and whether it should be included in the holiday pay calculation has remained a grey area.

Employers commonly calculate holiday pay by either dividing an employee’s basic salary by 1/260 (the number of working days in a year) or 1/365 (the number of days in a year) for a full-time employee. Normally the calculation will be set out in an employee’s contract of employment or written statement of terms and conditions which should be provided to new employees within two months of their start date.

We have seen an increase in the number of cases being bought by individuals claiming that holiday pay has been calculated incorrectly. The Supreme Court upheld the decision in the case of British Airways v Williams, a case dealing with allowances paid to pilots for time spent flying, that a worker should not be deterred from taking holiday by the fact that they would receive lesser remuneration during any period of holiday. Pilots’ holiday pay should include all supplements and not just basic pay.

The Employment Appeal Tribunal (EAT) in Bear Scotland v Fulton and another held that ‘normal pay’ is that which is ‘normally received’. The outcome of the Bear Scotland case was that regular overtime which is worked should be included when calculating holiday pay. This is unlikely to include pay for overtime for, say an odd extra hour here or there but a worker who works beyond their contracted hours each week or month should not be disincentivised for taking holiday. The question of voluntary overtime has until now not been addressed meaning that those who are not obliged to work overtime but habitually do, may have been missing out. This question appears to now have been addressed by the EAT in Dudley Metropolitan Borough Council v Willetts.

This case concerned 56 council employees including Quick Response Operatives carrying out housing repairs including, for example plumbing and roofing repairs and who worked voluntary overtime in addition to their core hours. Standby and call out allowances were paid for overtime worked. They bought claims asserting that their holiday pay was incorrect as it was calculated excluding voluntary overtime worked. The Council argued that overtime payments were not ‘normal pay’ as they could not require the employees to work overtime, it was entirely the employee’s choice. The EAT disagreed. It did not wish to narrow the interpretation as the principle that a worker should not be deterred from taking holiday (due to financial disincentive) is one which the law seeks to avoid.

So there you have it, holiday pay can include both voluntary and regular overtime. It will of course depend on the specific facts of the case but this case sets a good precedent.

This article is not a substitute for legal advice on specific facts and circumstances. It is designed as a free update on the law at the time of publishing. BakerLaw LLP accepts no responsibility for reliance on this article and recommends that you seek independent legal advice on your specific circumstances prior to taking any steps.