Holiday pay: When to include overtime in calculations?

New holiday pay ruling around overtime indicates that when voluntary overtime has been carried out with a degree of regularity, it should be included in the holiday pay calculation.

But what does a regular pattern look like?

In this post, we’ll explore what the recent rulings on overtime and holiday pay mean, and how employers should calculate holiday pay.

Different types of overtime

Before we jump in, it’s helpful to understand the different types of overtime.

• Voluntary is when there is no obligation for an employer to offer overtime or for the employee to work any overtime that is offered.
• Compulsory can be either guaranteed or non-guaranteed.
• Guaranteed compulsory is when an employer is contractually obliged to offer overtime and the employee must accept it when offered.
• Non-guaranteed compulsory is overtime that does not have to be offered by an employer, but must be accepted by the employee if it is offered to them

Does voluntary overtime need to be included in holiday pay?

If overtime is guaranteed and compulsory, it should always be included in holiday pay calculations, as it arguably a component of an employee’s ‘normal pay’.

Questions often arise around whether voluntary overtime also needs to be included in holiday pay calculations.

If we look at recent rulings, voluntary overtime, if worked regularly (as opposed to on a very ad-hoc and infrequent basis) should be included in the holiday pay calculation.

Without a hard and fast rule, it can be tricky to determine whether it is sufficiently ‘regular’. But, as a guideline:

• if there’s an expectation that a certain amount of voluntary overtime will be offered and worked each week or month
• and payments are made on a regular basis,

… it’s likely that it should be included in holiday pay calculations.

The same rules apply to non-guaranteed compulsory overtime. If it is carried out with regularity, it should be included in holiday pay calculations.

Consider the financial disadvantage to the employee

It can also be helpful to consider the following question when trying to evaluate if it should be classed as normal pay:

‘If the payments are not included in holiday pay, does this mean that the employee suffers a disadvantage when taking holiday?’

The minimum leave requirements under the UK Working Time Regulations exist to encourage all employees to take a minimum level of leave from work without suffering financially as a result of doing so. If not including overtime in holiday pay places the employee at a financial disadvantage, then they may be deterred from taking leave, which goes against the purpose of the minimum leave requirements.

So, if not including it in holiday pay would mean that an employee would be financially worse off for taking holiday, it’s likely that overtime payments ought to be viewed as making up their normal pay.

How to calculate holiday pay including overtime

Holiday pay should be calculated based on an employee’s normal pay. This means that when working out what an employee’s ‘normal pay’ is, you should also include what they have been paid for working overtime too.

Historically, normal pay has been calculated by looking at what an employee was paid over the previous 12 weeks. This is a very complex area, however, and under the Good Work Plan, from April 2020 this reference period will be increased to 52 weeks.

Keep voluntary overtime under review

Finally, it’s important to keep voluntary overtime under regular review.

What might have started off as very ad hoc, may well have become more frequent and regular, and therefore need to be included in holiday pay calculations.