Use of overtime as a means to flexibly manage capacity is widespread within the manufacturing industry. But whilst there are clear benefits to both employers and employees of using overtime to this end, it does carry risks for the employer.
Where a business operates with employees regularly working overtime, it is recommended the employer carefully review their holiday pay calculations following an important Employment Appeal Tribunal (EAT) decision in 2017 - Dudley Metropolitan Borough Council v Willetts and others. Employers would also be wise to assess the number of hours being worked by individual employees in an average week, so as to protect against risks posed by the working time directive and the 48 hour working week cap.
It is at this point worth reminding readers of the different types of overtime, these being:
Guaranteed overtime – whereby employers are obliged to provide overtime and employees are obliged to work it, as stipulated in the employment contract.
Non-guaranteed overtime – whereby employers are not obliged to offer overtime but where they do, employees are obliged to work it, as stipulated by the terms of their employment contract.
Voluntary overtime – whereby the employer is not obliged to offer overtime, but in instances where they do, the employees are not obliged to work it. For some time it has been clear that guaranteed overtime must be included in holiday pay calculations.
In 2014 it was further clarified by the EAT that non-guaranteed overtime must also be included in holiday pay calculations (using an average calculated over a 12 week reference period). In 2017, the EAT ruled in the landmark case of Dudley Metropolitan Borough Council v Willetts and others. In this case, 56 Dudley Council maintenance workers brought an Employment Tribunal claim against the council for not including voluntary overtime in their holiday pay calculations. The EAT ruled that voluntary overtime should be factored into holiday pay calculations where the overtime has become sufficiently regular or patterned so as to become part of employees’ normal working and the pay they receive for this overtime so regularly paid that it becomes part of their ‘normal pay’.
Clearly there is room for difference of argument in terms of what is so regular or patterned that it is now part of an employee’s normal working, or now forms part of their normal pay. The EAT did provide some clarity on this however.
In the case of Dudley Council, the maintenance workers that brought the case to the EAT only worked voluntary overtime once every four or five weeks. In reaching its decision that voluntary overtime should be included in holiday pay calculations, the EAT made clear overtime does not have to be worked every week for it to be considered regular. In this case, every four or five weeks was enough to be considered a regular pattern. Indeed a pattern of working whereby overtime was regularly seasonal may also need to be factored into holiday pay calculations, although such cases would be highly fact sensitive and have to be considered on their own merits.
Where voluntary overtime is considered so regular or patterned that it is included in holiday pay calculations, this should be approached using the average of a 12 week reference period.
Should your business rely on contractual terms that oblige employees to work overtime that is offered to them, it is important to note that employees cannot, by law, be forced to work more than 48 hours per week (averaged over 17 weeks). This is due to the ‘working time directive’. However, employees over the age of 18 can volunteer to opt out of the 48 hour cap. Where an employee chooses to do this, it is in the interests of the employer that this be stipulated in writing, signed by the employee and kept on file by the employer.
If your business utilises overtime it is advised that management undertake a review to ascertain:
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