As an employer, you have lots of things to think about, but it’s not always easy to keep up with the finer points. Something that causes a lot of problems amongst employers is overtime and holiday pay rules. Do you have to include the former in the latter or not? We’ve drilled down the details so you don’t have to…

When does overtime have to be included in holiday pay?

Holiday pay is calculated based on an employee’s working week and their usual work pattern. Your calculations need to follow certain conventions, especially in regards to overtime hours worked – this is to ensure that pay granted during holidays accurately reflects a worker’s actual earnings, not just their basic pay.

Understanding different types of overtime

This is your first, essential step: there are 3 different types of overtime that should all be considered individually:

  • Compulsory
  • Non-guaranteed
  • Voluntary

Let’s take a look at the specific rules of holiday pay that relate to each one in turn…

Compulsory overtime

This will be specified as such in the contract and means that you’re obliged to offer it to the employee, and that it’s set out as normal working hours. This overtime must be factored in when working out holiday pay, as it represents a normal working week.

Non-guaranteed overtime

This means there’s no contractual requirement for overtime to be offered by the employer, but if it is offered, the employee is contractually obliged to do it.

Recent case law dictates that if non-guaranteed overtime is offered on a regular basis – to the point that it’s considered normal – then there’s an argument for it being included in annual leave, as it represents part of the normal earnings an employee receives.

However, if it’s only offered occasionally, then there’s no need to include it in holiday pay calculations. If it’s to be included, then holiday pay for a week off would be calculated by averaging what the worker has earned over the previous 12 weeks. This is still regarded as new case law and its practical application can be complicated, so we urge Peninsula clients to take specific advice from our experts, so we can help you to identify the best way forward.

Voluntary overtime

There are no specific rules in this instance, where the employer has no obligation to offer overtime, but if they do, the worker is entitled to turn it down.

For example, an employer may tell their staff that there’s some overtime to be done, but doesn’t mind who does it. As this is a voluntary arrangement, an employer is not acting unlawfully by leaving this out of holiday pay calculations.

This aspect has been tested by the Court of Appeal in Northern Ireland, who said that there’s no reason in principle for voluntary overtime not to be included in holiday pay. However, this case is not binding in Great Britain and therefore does not need to be followed by employers based there… but keep an eye out for any updates we publish, as it’s not likely to be long before this aspect is tested in the British courts!

For further clarification, please call our Advice Service on 0800 028 2420.