It’s about this time of year—when the Great British weather shows no sign of improving—that your employees start booking their holidays.

And with flights to far-flung places like Thailand and the US cheaper than ever, it’s becoming more common for staff to ask for extended leave.

When your employees always work the same number of hours, calculating holiday pay is easy enough. Most 9-to-5 employees must receive at least 28 days’ paid annual leave—equivalent to 5.6 weeks of holiday.

But what about when your employees occasionally work overtime? When do you need to include this in holiday pay?

It may seem complicated, but things become a lot clearer once you know what the different types of overtime are and what the law says about each…

Compulsory overtime

This is when your employees must work overtime because their contract says so.

In cases like this, you should include overtime in holiday pay calculations.

Non-guaranteed overtime

This is overtime that you don’t have to offer, but when you do, the worker must accept.

An example of this is an ambulance trust that needs its drivers to work extra when there’s an emergency at the end of their shift.

If this overtime follows a regular pattern, and your workers expect it, then a tribunal will likely class it as ‘normal’. In this case, it should be part of holiday pay calculations.

Voluntary overtime

As the name suggests, this is when you leave it up to the employee to decide if they want to work overtime.

Until recently, employers thought they could leave out payment for voluntary overtime from holiday pay.

But an Employment Appeal Tribunal (EAT) ruling from 2017 suggests otherwise…

Landmark case turns overtime on its head

A local council employed a number of electricians, plumbers, roofers and others to do maintenance on council houses.

The council put the workers on a shift pattern where they would take it in turns to be on-call to deal with out-of-hours emergencies (compulsory overtime).

There was also a separate rota that they could choose to drop in and out of whenever it suited them (voluntary overtime).

While the council paid the workers for both sets of overtime, they didn’t include either in holiday pay calculations.

The workers believed the council was shortchanging them, so they made a claim for unlawful deduction of pay.

In its verdict, the EAT sided with the workers. It argued that any reduction in pay puts workers off from taking a holiday, so the council had to include all normal out-of-hours pay in their calculations.

So what does all this mean?

Let’s be clear—this case and others like it haven’t changed the law.

What the cases have done is set a precedent of how employment tribunals will look at overtime and holiday pay from now on.

If your staff work overtime, look at how often, and whether they expect the same amount of overtime each week or month.

Remember, when compulsory, normal non-guaranteed and normal voluntary overtime follow a regular pattern over a lengthy period of time, you’ll need to include them in holiday pay calculations for four weeks of leave.

You can pay the remaining 1.6 weeks of holiday at the normal contractual rate of pay.

If they think they’re being underpaid, your employees can make a claim within three months of the last underpayment.

And if they win, you could end up forking out up to two years’ worth of unpaid wages.