This is a question that is asked of us by our clients frequently!!
When calculating holiday pay for your employees should you take into account overtime that they have worked or not?
The simple answer is that holiday pay should be calculated on the basis of an employee’s normal pay. Where an employee regularly works overtime, this should be calculated within their holiday pay for the first four weeks of their 5.6 weeks entitlement.
These four weeks are the amount of annual leave that the EU Working Time Directive requires employers to give to employees and workers. While UK law does grant workers and employees an additional 1.6 weeks’ holiday, this 1.6 weeks doesn’t have to include voluntary overtime.
Unfortunately, there is no definition setting out how regularly overtime must be worked for it to be included in an employee’s holiday pay calculation, but the basic principle is that pay that is ‘normally received’ should be included.
If an employee has worked a settled pattern of overtime over a period of time, payment for that overtime is pay that they normally receive and must therefore be included in the holiday pay.
Where there is no settled pattern of overtime, the employer should calculate average pay over a reference period leading up to the period of annual leave. Although the courts have not addressed what a suitable reference period would be.
The inclusion of overtime in holiday pay calculations was tested in the Tribunal system in summer 2017, the Employment Appeal Tribunal (EAT) ruled that employers must include any regular voluntary overtime payments when they work out holiday pay for their staff.
The above court ruling was during the case of Dudley Metropolitan Borough Council v Willetts and others. The EAT ruled that where an employer makes regular payments for voluntary overtime to their staff, the employer must take these payments into account when working out holiday pay for the first four weeks.
It is very important to remember that this ruling was on overtime that was not contractual. If your employee’s contracts state that overtime is taken into account for any holiday payments then you will need to take it into account, regardless of how regularly the overtime is worked. Any commission received may also need to be taken into account if they have the contractual right for it.
How does this effect you?
If you are not already taking regular overtime into account, then you need to!
Failure to include overtime in the calculations could leave you vulnerable to Employment Tribunal proceedings which, if all of your employees make a claim, could be very costly both in terms of the awards and the cost of the defence.
Whilst you only need to take overtime into account for the first four weeks of the 5.6 statutory minimum, you need to consider whether this is feasible from an administrative point of view. It will be very challenging for the people who deal with the holiday calculations to take this into account, especially in larger companies.
Claims for underpayment of holiday
If an employee wishes to bring a tribunal claim, they need to do so within three months of the underpayment. The employee can claim for up to two years of underpayments from the last deduction.
For more information on holiday entitlements or any aspect of HR and Employment Law contact us on 0114 3032300 or email [email protected]. Why not watch our video telling you about our fantastic fixed fee service, Watertight HR & Legal?