In this important new appeal case involving Dudley Metropolitan Council and the workers who carried out housing repairs for the council, the question of whether voluntary overtime, out of hours standby pay, call-out pay and travel allowance should be counted when calculating holiday pay was considered.

The judgement means that all organisations will need to take a thorough look at what constitutes ‘normal pay’ for the purposes of calculating holiday pay.  If necessary, take some advice before deciding what to do next.  We can be contacted on 01636 653066, just ask for Sophie or Jane, or email enquiries@caminohr.co.uk.

Before looking at the judgement, let’s just have a quick review of what has happened to holiday pay in recent years:

Background

Regular guaranteed overtime

Most organisations will now know that regular guaranteed overtime needs to be included in holiday pay calculations.  It is self-evident that regular guaranteed overtime will form part of a worker’s normal remuneration which would mean that, if not paid during holidays, the worker would be financially disadvantaged by taking holiday.

Regular Work-related payments

The case of British Airways PLC v Williams and Others made it clear that regular work-related payments such as, in the case of the pilots at British airways their flying payment supplement and their hours away from base allowance, should be counted as normal pay for holiday pay calculations.  Many people we know argued that it was unreasonable to make a payment during holiday time which was compensation for unsocial or difficult work activity not being carried out whilst on holiday.  However, the same ‘normal remuneration’ argument applies here – the pilots are normally employed to fly and therefore their normal pay includes payments associated with flying.  They should not be disadvantaged financially by taking holiday, they should receive their normal pay.

Commission earned while at work

The case of Lock v British Gas Trading established that commission payments which a worker earns during their normal working time should be included in holiday pay calculations.  Again, many would argue that if the worker is on holiday and not making money for the business they are not entitled to the equivalent of a commission payment during their holiday.  The counter-argument is that the commission that they earn is part of their normal payment and therefore they should not be disadvantaged financially by taking holiday.

The Judge, in the appeal by Dudley Metropolitan council to a decision made by an employment tribunal, referred to these cases in coming to her conclusions.

The Dudley Metropolitan Council v G Willets and others

a) On the question of voluntary overtime, the Judge found that it was important to look at each case on its merits, not all voluntary overtime should be counted.  Three examples were given:

  1. Mr W works regular overtime which, although voluntary, is expected of him under his job description.  This was considered to fall within normal pay.  It was not unusual or rare, but regular.
  2. Mr P could do voluntary overtime but it was very rare that he did, and as such this was not said to be part of his normal pay.
  3. Mr C works regular Saturdays and is paid overtime.  He sees it as an extension to his working week and he is normally paid for it.  It therefore falls within normal pay.

b) On the question of standby payments and call-out allowances, the discussion was interesting.  Workers were only on standby one week in four or one week in five and could swap rotas with colleagues. The Council said that this should not be considered as part normal, arguing that for the majority of their working weeks the workers were not on standby and not called out.

The Judge disagreed and said that the question to be answered was what their normal pay was, not what their normal working week was.  She found that, particularly because this arrangement of one week in four or five had continued for a long time, the additional payment was part of their normal pay.  She pointed to the 12-week referencing period, usually used to calculate holiday pay for those with irregular working hours, which would have captured those payments.

The council also argued that the workers had the choice to take holiday during a time when they would not be on standby, thus not losing out on the payment.  This was not accepted by the Judge who again pointed out that the real question is whether normal remuneration is maintained in the holiday pay calculation.  If it is not, a deterrent effect is presumed irrespective of the opportunity the worker had to take annual leave at a different time.

c) Travel allowance was paid for all mileage undertaken in a private vehicle. It was paid at a rate higher than the recommended HMRC rate designed to recompense for expenditure. The Judge found that the additional, taxable, amount was a benefit in kind and therefore should be included in holiday pay calculations.

It should be noted that the judgement did make it clear that any compensation for expenses or for costs which might be incurred, such as a laundry allowance, would not be included, the reason for including the additional mileage allowance was that there was no other reason for that payment, it was not in compensation for any expense incurred.

So what now?

All organisations will need to review their holiday pay calculations and answer the question ‘which elements of pay form part of the worker’s normal pay?’.  It is no longer possible to discount a payment because the work done was voluntary or even infrequent.  Payment will count as “normal” if it has been paid over a sufficient period of time.   Items which are not usually paid or are exceptional will not need to be included.

There is, as yet, no legal referencing period for making such decisions – whether ‘normal’ should be something that happens over a period of months or years is not specified, so for the time being organisations should use sensible judgement and make it clear what their own guidance is.

We know of some organisations who have already decided that it is easier simply to determine holiday pay on the basis of the pay earned in the previous 12 weeks, as is the required approach for people whose pay is always irregular.  However, we think that could also pose problems.  For example, a worker could decide to do a large amount of voluntary overtime in the period leading up to the holiday but not at other times of the year whereas, conversely, a worker who regularly works overtime at a certain times of the year, because of a business need, will not have the amount included in their holiday pay if it is outside the 12 week referencing period.

There is still also the question of whether these calculations need apply only to the 4 weeks’ holiday required by EU law, rather than the full 5.6 weeks holiday which UK workers are entitled to.  For the time being it is still possible to apply it only to 4 weeks of holiday pay and organisations wanting to do this should clearly set out how this would work.

We would advise all organisations to take a thorough look at the ‘normal’ pay for all their workers over the last 12 months and then think what it is likely to be over the next 12 months. If necessary, take some advice before deciding what to do next and on how to document your decisions.  We can be contacted on 01636 653066 or by email enquiries@caminohr.co.uk.