HR & Employment Law Insights

Helping family businesses, start-ups, charities, social enterprises, and other growing or established businesses throughout the UK make sense of HR and Employment Law challenges.

We get asked HR related questions every day and each week we will be sharing our top question of the week that we have been asked here at The HR Booth.

In this article we answer the question when does overtime have to be included in holiday pay.

QUESTION

I have had an employee come to me and ask if he is entitled to overtime to be included in his holiday pay, is this the case?

ANSWER

As you may be aware from previous advice we have provided there has been some question about whether overtime and commission should be included when calculating your employees’ holiday pay. Officially, this has not been passed as legislation in the UK yet, so there is not a legal requirement for you to do so, but recent tribunal case rulings have concluded that holiday pay should take into consideration regular overtime, call-out, stand-by payments, and regular commission payments too. If you do not act on this now, then you risk a tribunal claim, which can be backdated up to 2 years for underpaid holiday pay, which could be costly.

By making this change to your holiday pay now, you can limit any potential tribunal claim, as anybody making a claim must have had an underpayment of holiday pay within 3 months of lodging a tribunal claim. Holiday pay should be calculated on the basis of the employee’s normal pay. Where an employee normally works overtime or normally receives commission etc. this should be included in the calculation of their holiday pay. There is no definition setting out how regularly overtime must be worked for it to be included, but the general principle is that pay that is “normally received” should be included in holiday pay.

At present most employers are looking at employees’ average pay over the 12 weeks before holidays commence for holiday pay calculation purposes. A further complication in the UK is that the right to be paid for non-guaranteed overtime in holiday pay derives from case law of the European Court of Justice, and so applies only to holiday pay for the four weeks’ minimum annual leave under EU law (20 days) and not to the additional 1.6 weeks provided for by the Working Time Regulations (28 days).

Employers should decide their policy on how to treat the additional 1.6 weeks’ statutory minimum leave and any additional contractual entitlement but may decide to include pay for overtime in all holiday pay to avoid complicating the administration of payments. To help you understand this if you have an employee who is contracted to work 20 hours per week but on average works 28 hours per week, for the purpose of holiday pay, that employee should be paid for 28 hours and not the contracted 20 hours. You should review your existing arrangements, including overtime and hours, worked, and assess if you need to make any updates to your overtime and holiday pay schemes.

YOUR TURN

Have you dealt with a similar situation in your organisation?