Calculating Holiday Pay: The Overtime Factor

Should overtime be included in the calculation of worker’s holiday pay, even where they have normal hours and no contractual entitlement to work overtime?

In the recent case of Neil v Freightliner Ltd, the Employment Tribunal controversially decided yes.

What do the Working Time Regulations say?
The Working Time Regulations 1998 (WTR) provide that workers are entitled to 5.6 weeks’ statutory annual leave. Workers must be paid at the rate of a week’s pay for each week’s leave, calculated in accordance with a complicated regime contained in the Employment Rights Act 1996 (ERA). Under the ERA regime, where a worker has ‘normal working hours’ (i.e. set contracted hours) then holiday pay is calculated in relation to these hours only. If a worker’s pay varies from week to week, holiday pay is calculated by reference to the average pay over the preceding 12 week period and overtime is excluded unless contractually provided for. Any voluntary overtime is therefore ignored.

What happened in this case?
Mr Neil’s contractual hours were 35 hours from Monday to Friday, but he would frequently work shifts of between 9 and 12 hours. Mr N’s employer, Freightliner Ltd, calculated holiday pay based on the 35 hours provided in the contract. Mr N brought a claim in the Employment Tribunal (ET) that his employer was breaching the WTR by failing to take account of the time that he actually worked rather than his contractual hours. Mr N therefore claimed that Freightliner had made unlawful deductions from his wages.

Case Law
Mr N relied on the European Court of Justice (ECJ) decision in Williams v British Airways plc whereby it was held that any aspect of pay that is “intrinsically linked” to the performance of the tasks required to be carried out under the contract of employment, should be included in the calculation of holiday pay. Freightliner argued that Williams did not change the accepted position that overtime should only be included in the calculation of holiday pay where the employer is contractually required to provide overtime and the worker is contractually obliged to work overtime. Freightliner sought to rely on the Court of Appeal decision in Bamsey v Albon Engineering & Manufacturing which confirmed that voluntary overtime should not be included in holiday pay calculations.

Employment Tribunal decision
The ET held that Williams meant Mr N was entitled to receive holiday pay calculated in reference to his contractual hours and the overtime worked. This was because the work undertaken as overtime was held to be “intrinsically linked” to the tasks that he was required to carry out under his contract of employment. The fact that Mr N may have volunteered to do these tasks as overtime did not mean that they were not an aspect of pay that was “intrinsically linked” to the performance of his duties.

What does this mean?
This decision is significant as it departs from the accepted position that overtime should not be included in holiday pay. However, the decision is not binding and has been appealed (a hearing date is currently awaited). The Employment Appeals Tribunal (EAT) and potentially the higher courts will therefore have the opportunity to consider the matter. For the time-being, employers should at least consider taking paid overtime into account when calculating holiday pay, if the tasks that their workforce undertake as overtime are the same, or closely linked to the tasks undertaken during normal working hours. Most employees will pre-dominantly continue their normal duties (over extra hours) due to the business needs and may therefore benefit from this case law development. We will be following this case closely and providing a further update on this website in due course.

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