Holiday pay and overtime

Holiday pay

Over the past year we’ve been asked many times about holiday pay and whether overtime rates should be incorporated. The simple answer is yes, however, the main confusion has been around what type of overtime is covered, with many employers questioning whether ‘voluntary’ overtime should be included.

Adding to the confusion, employers use a variety of definitions for ‘overtime’, for example:

  • guaranteed
  • non-guaranteed
  • mandatory
  • voluntary
  • regular
  • excess hours
  • weekend cover
  • and so on

With so many legal cases relating to holiday pay employers are, understandably, confused as to what they should actually be paying.

If it’s regular, it’s included

It’s fair to conclude when looking at all the legal cases so far that the rulings could apply to any type of overtime (by whatever definition) where it is carried out by workers on a regular or consistent basis.

As for ‘voluntary’ overtime, the Court of Appeal in Northern Ireland was the place to be last June. In this case the judges stated categorically that voluntary overtime can be included in holiday pay, if it is normally carried out and is an “appropriately permanent feature” of the worker’s remuneration.  (As a Northern Ireland case, this decision is not binding on courts and tribunals in England, Wales and Scotland although it will be cited in holiday pay cases and may be persuasive.)

Other points to consider:

  • Commission should be factored into statutory holiday pay calculations
  • Work-related travel may need to be factored into statutory holiday pay calculations
  • Only the 4 weeks’ annual leave entitlement under the original Working Time Directive are currently covered rather than the full 5.6 weeks’ leave provided by UK law

Top tips

  • Review your overtime arrangements to ensure you have sufficient control over them
  • Clarify the contractual position of overtime and overtime pay
  • Implement checks to avoid abuse and manipulation of holiday pay
  • Ensure you are consistent in the way you calculate holiday pay to include overtime, commission etc.
  • If an employee works a variable amount of overtime (most cases) decide what reference period you will use to calculate the appropriate rate of holiday pay
  • Minimise your liability to claims of underpayment

Claims for underpayment 

The government has agreed a two year limitation on back-dated holiday pay claims. The limitation took effect from 1st July 2015. This means that employees can only claim up to two years back-dated holiday claims.

This still seems to be a potentially significant financial exposure. However, the normal rules still apply and backdated claims can only be brought for underpayments forming a series which is not broken by a gap of more than three months between each underpayment.

Contact us for advice on calculating holiday pay to avoid costly and time-intensive tribunal claims.