When do employers need to include overtime in holiday pay?
Holiday pay must be calculated on the basis of an employee’s normal pay. Where an employee normally works overtime, this should be included in the calculation of their holiday pay.
Overtime that the employer is contractually obliged to offer and that employees are required to work, must always be included in holiday pay.
There is no definition setting out how regularly overtime must be worked for it to be included, but a general principle is that pay that is “normally received” should be included in holiday pay. 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 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.
Voluntary overtime must be included if it is part of a pattern of work that is sufficiently settled and regular to justify the description “normal”. The Employment Tribunal would decide on the facts of each case.
The right to be paid for non-guaranteed overtime in holiday pay originates from case law of the European Court of Justice, and so applies only to holiday pay for the four weeks’ minimum annual leave under EU law and not to the additional 1.6 weeks provided for by the Working Time Regulations 1998 (SI 1998/1833). Employers should decide their own policy on how to treat the additional 1.6 weeks’ statutory minimum leave and any additional contractual entitlement. An employer may decide to include pay for overtime in all holiday pay to avoid complicating the administration of payments.
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