Should overtime be used in holiday pay calculations?
Please note, legislation has been updated in regards to holiday calculations since this article was written, effective for holiday years starting on or after 1 April 2024, so some of the content below may be out-of-date. If you’re a Moorepay client, please contact us if you need guidance. Otherwise, please see this article on the changes for more information.
Following the landmark case in 2014 which ruled that overtime could be included in Holiday Pay, overtime now plays a part in this calculation. In this article we detail when you need to factor overtime payments into your holiday pay calculations – and how it affects the way you approach annual leave.
So, does overtime count towards holiday pay?
In short, yes overtime payments are a factor when it comes to holiday pay. Acas guidance states that by law, holiday pay must include regular payments that have been regularly paid to an employee during the last year (52 weeks) of service. This includes overtime payments.
What ‘regular’ means in this instance is not outlined, but it’s safe to say that if overtime is fairly common or consistent for one or more of your employees, you’ll need to consider it when working out the payroll.
What else must holiday pay include?
Holiday pay must also include payments linked to doing tasks required in the employee’s contract, for example commission, and payments related to professional or personal status, for example for pay-outs for length of service, seniority or professional qualifications.
As an employer, you must include any relevant payments in at least 4 weeks of your holiday pay. You may include these payments in your full 5.6 weeks’ paid holiday (statutory annual leave), but you don’t have to.
The context behind the legislation
Pre-2014, non-guaranteed overtime was not used in the calculation for holiday pay at the time that employees take leave. This was long criticised by Unions on the basis that, as they see it, it penalised workers for taking the time off that they are entitled to. Indeed when you consider that the right to paid leave arises under the Working Time Regulations 1998, which is in essence a health and safety provision. If an employee is regularly paid less for time off work than they are when they are at work, it is not difficult to understand the view that it creates a disincentive to take the time off work work that the law requires is taken.
The situation was finally addressed in 2014 by the Employment Appeal Tribunal in the case of Bear Scotland v Fulton (which also encompassed the cases brought against Hertel (UK) Ltd and Amec Group Ltd). It was held that the Working Time Regulations could and should be interpreted as to mean overtime ought to be included in the basis for a calculation of holiday pay when an employee or worker takes leave.
The main points of the landmark judgment were:
1. Holiday pay should be calculated so as to include a sum to reflect normal non-guaranteed overtime;
2. This only applies to the basic 4 weeks’ leave originally introduced by the Working Time Regulations 1998 (as amended), and not the additional 1.6 weeks subsequently brought in under Regulation 13A of the same regulations;
3. Claims for historical underpayments based in the previously accepted calculation method will not have been brought within the relevant time limit (subject to the reasonably practicable test) if there has been a break of more than three months between successive underpayments;
4. Travel time payments, which exceed expenses incurred and so amount to additional taxable remuneration, should also be reflected when calculating holiday pay.
At the time, of the estimated 30,000,000 workers in the UK, approximately 5,000,000 regularly received overtime payments. This decision therefore had widespread impact, most notably across the manufacturing industry where it is believed that over 90% of employers would suffer financially as a result of the decision.
In the run up to the decision, there were significant fears that the decision could create a groundswell of claims for backdated holiday pay, possibly back to the introduction of the Working Time Regulations in 1998, at a potential cost of billions of pounds.
