News & Views

Holiday Pay & Overtime – to include or not to include?

Most employers will be aware of the continued uncertainty surrounding the calculation of holiday pay but we are beginning to see light at the end of the tunnel.  The Employment Appeals Tribunal (“EAT”) recently concluded that regular payments for voluntary overtime must be taken into account when calculating holiday pay.

The clarification comes after a number of cases on this very subject – none of which gave clear answers to all the different issues. In particular, the issue of whether or not overtime payments should be included when calculating holiday pay has been unclear insofar as that overtime is genuinely voluntary.

Whilst this might cause some concern for employers, it does not mean that ALL over-time received in the pay reference period should be included. In summary, the EAT said:

  • Holiday pay should reflect “normal remuneration” so that workers are not discouraged from taking annual leave (because of a resulting drop in income).
  • What counts as “normal remuneration” is a payment that is paid over a sufficient period of time and on a regular or recurring basis. Therefore voluntary overtime can come within this if it is, indeed, on a regular basis. Whether overtime falls to be included is a question of fact, depending on the circumstances.
  • Elements which are not usually paid or are exceptional do not fall within “normal remuneration”.

It is important to remember that these principles only apply to the 4 weeks of holiday specified within the EU Working Time Directive and do not apply to the additional 1.6 weeks added as a result of the Working Time Regulations 1998 or any enhanced contractual entitlements to holiday. Employers who are affected will need to consider whether to purely apply these principles to just the 4 weeks’ leave under the Directive or to apply it to all leave.

Employers ought to consider now whether payments received by staff for voluntary overtime are regular enough to be classified as “normal remuneration”. This is not always a straightforward answer, particularly in seasonal businesses where “regular” over-time is concentrated into a particular period.

If you require assistance or advice on this particular issue, please contact the employment team (Mark Fellows, Jo Perry and Priya Magar).

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