Overtime and holiday pay

06.01.2020
Vicky Webber
Human Resources

Employers run the risk of receiving a claim for unlawful deduction of wages if they are not taking in to account overtime payments when calculating a worker’s holiday pay

With recent court decisions indicating that holiday pay should include all regular overtime, as well as voluntary overtime, it is important that employers are correctly calculating holiday pay to ensure workers receive the same pay whilst on annual leave as they would receive whilst at work.  

​Categories of overtime

Any time worked in addition to the normal, contracted working hours will usually be classed as overtime which can be;

• voluntary - there is no obligation on an employer to offer overtime and no obligation on the worker to do overtime if it is offered. A worker should not be subject to any detriment for turning down voluntary overtime;
• compulsory and guaranteed - an employer is contractually obliged to offer and a worker is obliged to accept; and
• compulsory but non-guaranteed - overtime does not have to be offered by an employer but when it is offered, the worker must accept and work it.

Holiday pay

Workers are entitled to receive their normal remuneration during periods of holiday to ensure they are not deterred from taking their annual entitlement. This means overtime, including regular voluntary overtime, must be included when calculating a worker's statutory holiday pay. Overtime pay only needs to be taken in to account for the four weeks’ annual leave provided by the Working Time Directive and not the additional 1.6 weeks provided by the Working Time Regulations or any enhanced contractual leave entitlement. The only time overtime would not be included is when it is worked on a one off, ad hoc occasion.

To ensure holiday pay includes overtime pay, the worker’s normal remuneration should be calculated by working out their average pay over a reference period. The most common reference period is the previous 12 weeks to when they take the holiday. Some industries that require employees to do a lot of overtime in particular periods may find the previous 6 to 12 months a more accurate reference period and in any case, the government has legislated for the reference period to be 12 months with effect from 6 April 2020.

Alternatives to overtime pay

Many employers choose to provide time off in lieu for additional hours worked. Offering time off in lieu removes the need to include overtime payments in holiday pay calculations, however this method may not be suited to businesses with high levels of overtime or smaller teams due to the additional leave accrued.

Other payments which should be included in holiday pay

As well as the overtime described above, there are number of other payments which must be taken in to account when calculating a worker’s holiday pay. These include commission, bonuses, travel time allowances and payments relating to a worker’s professional or personal status. Any payments which are fundamentally linked to the performance of the work carried out, and in respect of which pay is provided, must be included in the calculation of the worker's total holiday pay.

Our HR consultancy team have created a spreadsheet to assist with calculations of holiday pay. If you would like a copy of this or further information on holiday pay or other HR related queries please get in touch.

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