Did you know voluntary overtime must be included in holiday pay?

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As an employer, you might not think that voluntary overtime should be included in holiday pay. Previously, there hasn’t been a black and white decision on this, but now there is. The Employment Appeal Tribunal (EAT) has ruled that voluntary overtime must be included in holiday pay.

The calculation of holiday pay has been part of a long running debate in the courts. In the past it was ruled that employees should be paid their ‘normal remuneration’ when on annual leave. However, it wasn’t clear whether voluntary overtime counted as normal remuneration.

But, for the first time, the EAT has heard a case on voluntary overtime. And, in an earlier case, it had been decided that non-guaranteed overtime should be included in holiday pay. With that in mind, it’s not a surprise that the EAT ruled the same way with voluntary overtime. Not including payments which reflect regular or recurring voluntary overtime would deter employees from taking leave they are entitled to. This could ultimately prevent employees from exercising their rights.

How does this affect you?

Since the issue of overtime and holiday pay was raised, an initial decision was published last year. Though many employers decided to hold off on changing their holiday pay policy until there was something more concrete. Now the decision is binding it’s important that you update your policies on pay.

The safest way to ensure your employees are paid their ‘normal remuneration’ during their annual leave is to calculate holiday pay based on their actual earnings for a 12 week period prior to their holiday. Although, there could be some exceptions. For example, if overtime is seasonal it may be better to calculate pay based on 12 months not 12 weeks. It’s vital to ensure that any holiday pay given reflects your employee’s normal pay.

Another exception is that the rule only applies to the 20 days holiday employees are entitled to under the Working Time Regulations. Bank holidays and any additional contractual holidays are not subject to the voluntary overtime rule. These can be paid at the basic contractual rate.

Managing your employees overtime

It is now more important than ever that you ensure you are keeping track of any overtime worked.

Important points to consider:

  • Employees voluntarily working overtime to such an extent that it could be classed as part of their normal working hours
  • Any patterns of voluntary shifts over a long period of time which could be argued to have become ‘normal’

Even if the shifts are only worked one week out of five, if it is happening on a regular basis, it might need to be included.

What else should you be aware of?

Although it’s not been considered in the courts yet, it’s likely that holiday pay for an employee who takes time in lieu, rather than payment for voluntary overtime, will not be affected.

As well as considering the implications overtime could have on holiday pay, you also need to make sure that overtime does not result in a breach of the Working Time Regulations. For example; if an employee working voluntary overtime regularly exceeds the maximum 48 hour working week. Should there not be an agreement in place, the employee could claim compensation for the breach.

If you would like assistance or require further information on calculating holiday pay for your employees, please contact Jelf Risk Management on 0345 040 0002 and ask for the Employment Law team.

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A CIM qualified, results driven marketer. Stacey has a focus on delivering a wide range of marketing solutions to exceed client expectations.