Is it a legal requirement for me to factor in overtime (and other earnings) when calculating holiday pay for my employees/workers?
Yes. It is unlawful to pay holiday pay based on basic earnings only, excluding overtime and other earnings. Employers who ignore this legal requirement face an unlawful deduction of wages claim.
When an employee or worker takes holiday, they should get the same pay when they are on holiday as when they are at work – whatever their working pattern.
If an employee regularly gets paid overtime, commission or bonuses, the employer must include these payments in at least 4 weeks of the paid holiday.
Some employers may include overtime, commission or bonus payments in the full 5.6 weeks paid statutory annual holiday, but they do not have to.
This is because the law on overtime, commission and bonus payments being included in holiday pay is based on the EU Working Time Directive which is 4 weeks holiday only. While UK law does grant workers and employees an additional 1.6 weeks’ holiday, this 1.6 week does not have to include voluntary overtime.
The other factor to consider as part of the decision to use either the 4 week or 5.6-week period for the calculation, is the administrative burden it places on your Payroll department. Whilst you only need to take overtime into account for the first 4 weeks of the 5.6 statutory minimum, you need to consider whether this is feasible from an administrative point of view. It will be very challenging for the people who deal with the holiday calculations to take this into account, especially in larger businesses.
How regularly must an employee/worker work overtime for it to be included in the holiday calculation?
Unfortunately, there is no definition setting out how regularly overtime must be worked for it to be included in an employee’s holiday pay calculation, but the basic principle is that pay that is ‘normally received’ should be included.
If an employee has worked a settled pattern of overtime over a period of time, payment for that overtime is considered to be pay that they normally receive and must therefore be included in the 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.
As of April 2020, the reference period of determining a week’s pay for the purposes of calculating holiday pay was increased to 52 weeks.
What are the penalties to employers if they do not include overtime and other earnings?
The employee can claim for up to 2 years of underpayments from the last deduction (i.e. the last holiday payment).
If you are not already taking regular overtime into account, then you need to. Failure to include overtime in the calculations could leave you vulnerable to an Employment Tribunal claim on grounds of unlawful deduction of wages.
What do I need to do next?
Start by understanding which employees/workers are impacted over the retrospective 2 year period. Next, calculate the total cost of the under payment remembering to factor in overtime and holiday payments already made during the 2 year period. Then decide how you/the business, will approach the under payment with employees and communicate the decision to them. Finally, remember to update your contract of employment template, employee handbook and your holiday policy.
If you are unsure how best to proceed or you would like further advice and support, contact us at Trinity HR (01202 firstname.lastname@example.org.