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Factoring in Overtime Payment when Calculating Holiday Pay


This article has been submitted by Peter Lynn and Partners

With more and more businesses operating flexible hours, the “9-5, Monday to Friday” working pattern is rapidly becoming a thing of the past. Many businesses allow staff to work overtime and often at a higher hourly rate.  This poses a question that we are frequently asked “Do I have to factor in overtime payment when calculating holiday pay?”

Over recent years, there has been an increasingly steady march in employment related court decisions as to what elements of remuneration ought to be included when an employer calculates how much an employee should receive when on holiday.

The starting point for these cases was that an employee was only entitled to receive their basic weekly wage (which excluded payments such as overtime, commissions and allowances). Consequentially an employee who was taking annual leave would effectively suffer a pay cut as a result of having a holiday.

Various union backed appeal challenges have seen the definition of normal remuneration be expanded to include elements for guaranteed overtime, non-guaranteed overtime (that was regularly and habitually worked) and commission payments. Thus pushing up the wages that employers had to pay out to employees on leave.

A recent case has expanded this further to include voluntary overtime payments and other allowances such a shift allowances and those related to inclusion on call out rotas even though inclusion on such rotas may be completely voluntary and without compulsion on behalf of the employer.

This latest decision is, at present, a low level tribunal decision which higher tribunals (and others of a similar level) are not obliged to follow but nevertheless, it gives an insight as to how this issue is likely to develop and is likely to lead to the rate of holiday pay entitlement increasing for employees and employers alike.

For matters relating to HR and Employment Law, contact Peter Lynn and Partners on 02920 600799 or email [email protected]