Overtime and Holiday Pay

Overtime and Holiday Pay Explained

Tina Ripley our Employment Solicitor explains the recent decision of the Employment Appeal Tribunal with regard to overtime and how that affects holiday pay.

Employees on annual leave are entitled to be paid their normal remuneration. Overtime, commission and bonus have in the past been excluded from this calculation.  In the case of Bear Scotland v Fulton and Baxter, Hertel (UK) Ltd v Woods and other and Amec Group Ltd and others the Employment Appeal Tribunal has ruled that non-guaranteed overtime is to be included as part of normal remuneration when calculating holiday pay.

When do employers have to include overtime in holiday pay?

Employers are now required to include non-guaranteed overtime as normal remuneration when calculating holiday pay.  Non-guaranteed overtime is defined as overtime that the employer is not obliged to provide but where it is offered to the employee the employee is contractually obliged to perform it. The case does not deal with voluntary overtime and given developments in European law, employers should keep up to date with the law on this area.

Does overtime have to be taken into account for all holiday pay?

No.  Overtime only needs to be taken into account for holiday pay relating to the four weeks of statutory holiday taken by the employee in any holiday year.

Can employees make a claim for back pay?

Yes. However employees cannot make a claim for back pay where there is a gap of more than three months since the last underpayment. The Government has introduced legislation to limit a claim for back pay to two years however this only applies to claims made on or after 1 July 2015.

How should employers now calculate holiday pay?

This is not clear yet.  The UK government will now need to determine what the reference period is for calculating holiday pay which includes overtime.

What should employers do?

Employers therefore need to be checking their employees’ contracts of employment generally on holidays and to see if employees are contractually obliged to perform overtime if it is offered to them.  If an employee is contractually obliged then that overtime pay should going forward, be taken into account when working out an employee’s holiday pay. Employers should also be deciding what is “normal remuneration” and assessing the likely financial impact of the case.

If an employee makes a back claim remember there is no liability to pay this if more than three months have elapsed from when the holiday was taken.

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