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More guidance on overtime and holiday pay

There has been further Court guidance about the extent to which employers need to include overtime in holiday pay calculations.

Under the Working Time Regulations, workers are entitled to have their holiday pay calculated at the rate of a week's pay for each week of leave. But how should employers calculate a "normal week's pay" where the employee regularly, or even irregularly, works overtime?

Types of overtime

The type of overtime offered by employers will affect how employees' holiday pay is calculated. Broadly speaking, there are three types of overtime: guaranteed overtime, non-guaranteed overtime and voluntary overtime.

Guaranteed overtime is where the employer is obliged to offer and pay for any agreed overtime worked. It is clear that guaranteed overtime should be taken into account when calculating holiday pay.

Non-guaranteed overtime is where the employer is not obliged to offer overtime but, if they do, the employee is contractually obliged to do the work.  In 2014, the Employment Appeal Tribunal clarified that holiday pay should be calculated taking overtime into account using a 12 week reference period in these situations.

Voluntary overtime is where the employer asks the worker to work overtime and the worker is free to turn down the request - so there is no contractual obligation on either side to offer or accept overtime. Until recently there was no case law to suggest that voluntary overtime needs to be taken into account when calculating holiday pay. However, the Court of Appeal has now held that there is no reason in principle why voluntary overtime should not be included in the calculation of statutory holiday pay. This judgment sounds alarm bells for employers who offer voluntary overtime but do not include payment for that overtime as a factor in calculating holiday pay. 

At what point does voluntary overtime become normal working hours?

The Court stated that, when determining whether or not voluntary overtime should be included in the calculation of statutory holiday pay, Tribunals should look at the facts of each case, with particular focus on the regularity of the overtime, and whether the remuneration received by the employee is a "sufficiently permanent feature" of the employee's normal remuneration.

The Court also indicated that, where an employee's hours vary, it is necessary to make an assessment on whether there is sufficient amount and regularity of overtime working to conclude that this is the employee's normal working pattern. Again, this is a factual assessment to be made in each case.

Although the issue whether true voluntary overtime should be included in the calculation of holiday pay remains uncertain, suggestions from the recent case law allows employers to assess whether they should in fact be factoring voluntary overtime into holiday pay calculations.

Employers should assess the following:

  • Does the employee work overtime on a regular basis?
  • Is overtime part of the employee's normal working pattern?
  • Does the employee receive remuneration for the overtime worked?
  • Is the remuneration received a permanent feature of their pay?

If the answer is "yes" to these questions, it would be prudent for employers to pay their workers holiday pay taking into account the overtime worked by employees. 

Summary

  • Guaranteed overtime must be included within the calculation of holiday pay.
  • Non-guaranteed overtime must be factored into to calculation of holiday pay.
  • Voluntary overtime, if paid on a regular basis, should be factored into to calculation of holiday pay.

If you would like any further advice in relation to calculating holiday pay in light of overtime, please contact the Ashfords Employment Team.

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