News

It has widely been understood that when calculating holiday entitlement 'voluntary' overtime payments are not included.  

However, the recent case of Neal v Freightliner Ltd has thrown doubt on this and stated that in certain situations, where overtime is 'intrinsically linked to the performance of the job' it has to be taken into consideration for holiday payment purposes.  

Background:

Under the Working Time Regulations 1998, holiday is calculated based on a 'week's pay' for each week of leave and a week for those with contracted hours will normally be their basic contracted hours.  

Where overtime is compulsory, a week's pay has to include overtime payments. However where overtime is 'voluntary', overtime will be excluded for holiday calculation purposes.    

Facts of the Case

Mr Neal was employed as a "multi-skilled operative" (MSO). His contract provided for a basic 35 hour week (5 x 7 hour shifts) and stated that he may be required to work overtime when necessary. In fact, as a result of the rota system, Mr Neal's shifts were regularly 8.5 or 9 hours. It was agreed that he never worked a shift as short as seven hours.  

When the employer calculated his holiday pay based only on his basic salary, Mr Neal brought a claim for unlawful deduction of wages arguing that the calculation should take in to account all the hours he worked. Mr Neal claimed that his employer required him to work the longer hours. Conversely his employer claimed that any MSO who refused to work more than the 7-hour contractual requirement would not be forced to so. The employer's argument was, therefore, that Mr Neal's overtime was voluntary and consequently was not within the definition of "performance of the tasks which he is required to carry out under his contract of employment" and therefore did not have to be included in his holiday calculation.  

Decision

The Employment Tribunal held that Mr Neal was entitled to receive holiday pay which was not solely based on his basic salary. The Tribunal confirmed that Mr Neal was entitled to have other components taken into account, provided that they were intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment. The Tribunal further held that since Mr Neal's duties were to perform his contractual obligations as an MSO, the work which he carried out as overtime fell within this definition. The fact that he may have volunteered to perform those tasks at times outside those which he was contracted to did not mean that performance at those times was no longer "intrinsically linked".  

Further, Mr Neal was able to claim holiday pay going back to 2007 when his employment first began.  

Implications:

This could be a very expensive decision for employers and would significantly increase the cost of holidays for many employers.  

However, at this time it is only an Employment Tribunal decision and does not have to be followed by other Employment Tribunals and it may well be subject to appeal.  Nevertheless, employers should be mindful of the decision and possibly review any circumstances where overtime, although voluntary, is 'expected' and performed on a continual basis (please read the facts below as an example).  

In addition this case only applies to the first 4 weeks of the total 5.6 weeks holiday, but splitting out the holiday will be an administrative headache (but may be financially worth it).  

In essence, it looks as if  holiday payment calculations are moving towards being based on workers' average earnings in the 12 weeks leading up to their holiday for all workers (not just those without normal working hours).

Watch this space for further developments...

Case: Neal v Freightliner Limited: 

Employment Tribunal (ET 1315342/12)