The law around overtime holiday pay continues to evolve. Because of this, holiday pay entitlement for staff who work overtime is a trickier subject than it might seem on the surface.
That’s why we’re here to break it down for you. But if you want immediate advice, then you can refer to our employment law advice services for immediate assistance.
The different types of overtime
It’s important to remember there are three types. These are:
- Voluntary: Where you’re not obliged to offer any and an employee doesn’t have to accept.
- Compulsory: It’s required you offer your staff members and they have to accept it.
- Non-guaranteed: This is where you aren’t obliged to offer overtime, but an employee must accept it when you do.
For the purpose of this guide, we’re focussing in on the first type—voluntary overtime.
What kind of overtime counts towards holiday pay?
First of all, should holiday pay include overtime? In the summer of 2017, the Employment Appeal Tribunal (EAT) ruled you must include any regular voluntary overtime holiday pay when you work out how much to provide your employees.
The new ruling on overtime and holiday pay means the four weeks of annual leave is a minimum requirement under the Working Time Regulations.
UK overtime holiday pay law grants workers and employees additional time.
The Working Time Regulations are British law that includes entitlement to an extra 1.6 weeks—that makes 5.6 weeks as a minimum.
The above court ruling was during the case of Dudley Metropolitan Borough Council v Willetts and others.
There’s also the 2019 case of East of England Ambulance Services NHS Trust vs Flowers & Ors. Here, take voluntary overtime into account when it’s sufficiently regular and settled.
The EAT ruled that where an employer makes regular payments for voluntary holiday pay for overtime to staff, the employer must take these payments into account when working out holiday pay for the first four weeks.
This ruling was because the European courts have decided holiday pay (pay during annual leave) must reflect “normal remuneration”—the money your staff earn when they’re at work.
This is so that people don’t feel discouraged from taking their European entitlement of 4 weeks’ annual leave. Who would want to take their holidays if they were going to get less pay?
An EAT ruling on overtime and holiday pay was great news for staff.
It’s another sign that UK and European case law has continued to progress when it comes to what an employer needs to include when calculating pay for workers and employees for EU holiday.
Holiday pay and overtime rulings are a hot topic and it’s fair to expect the law will evolve further—especially after the UK leaves the EU.
Currently, overtime pay in the UK that’s compulsory also counts towards the full 5.6 weeks.
And, when you calculate your employees’ holiday pay, you should include any non-guaranteed overtime that forms part of regular remuneration, so long as this is for the first four weeks’ holiday pay.
How to calculate holiday pay (including overtime)
The pay is based on a week of pay. Where individuals don’t work a fixed schedule or varying hours then you’ll have to work out the average pay over the previous 12 weeks.
This will go up to 52 weeks on 6th April 2020 as part of the government’s Good Work plan.
You should keep the Employment Rights Act 1996 in mind when making holiday pay calculations (including overtime). A working week has basic pay and includes any overtime. Things get a bit more complicated as holiday pay should include:
- Contractual commission.
- Voluntary, compulsory, or non-guaranteed overtime.
- Any KPI bonuses.
- Travel allowances etc.
You should work this out carefully to avoid any claims of unlawful deduction from wages. Our time off in lieu (TOIL) software helps you keep track of everything, which makes it easier to calculate holiday pay on overtime amount.
There are free tools you can use for this as well. You can calculate holiday entitlement on the official government website.
What is normal non-guaranteed overtime?
Okay, so this is overtime that you haven’t guaranteed to your employees in their contract, but if you require it of them, they have to work it.
Claims for underpayment of holiday
An employee needs to bring an employment tribunal claim within three months of the underpayment.
So, if you underpaid your employee in June, they have until the same date in September to make their claim.
For overtime holiday pay backdated, there's a two-year limit that applies to when employees are creating a chain of underpayments for backdated holiday claims.
In summary—should overtime be included in holiday pay?
Whether you like it or not, overtime holiday entitlement is here to stay.
You must also include commission (although there are limitations, so this’ll only apply when it’s a regular part of normal payment), and in some cases, you will need to factor in the cost of the employee’s work-related travel—can you guess for how many weeks of holiday pay? That’s right—four.
Are there any exceptions involving overtime and holiday pay?
Yes. In the UK, overtime that employees work on a "genuinely occasional and infrequent basis" only, as Acas puts it, doesn’t need to count as part of a statutory holiday pay calculation.
Keeping up with evolving laws isn't something you've got time for while you're trying to grow your business, is it?
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