Overtime pay on holidays

As an employer in the UK, your employees are entitled to 5.6 weeks’ paid holiday per year. But what happens when an employee works overtime? And do you have to include overtime when calculating holiday pay?

Although it may seem simple, determining the holiday pay entitlement for staff who work overtime can be a complex issue, especially with ever-evolving employment laws. Not to mention the cost of getting it wrong.

So, it's important to understand the law around overtime and holiday pay. That’s why we’re here to break it down for you.

What types of overtime do you need to include in holiday pay?

When your employees work additional hours outside of their standard contracted hours, this is called overtime. There are generally three types of overtime, these are:

Voluntary overtime

Voluntary overtime is when you offer your employees additional hours, but they do not have to accept the overtime work.

Compulsory overtime

Compulsory overtime is when your employees are required to work additional hours because you have stated so in their employment contract.

Non-guaranteed overtime

Non-guaranteed overtime is when you're not obligated to offer overtime to your employees, but if you do, your employees must accept the number of hours offered to them.

All three types of overtime must be considered in holiday pay. Compulsory overtime must be included always, while non-guaranteed and voluntary overtime must be included when it’s regularly performed—only in 4 weeks of holiday in the leave year.

It's important to note that by law you cannot force your employees to work more than an average of 48 hours per week unless your employee agrees to this in writing.

You aren't legally required to offer extra hours or pay employees for additional work—unless you have stated so in your employment contracts. And if you do you must ensure that the average hourly rate for all hours worked in your pay reference period doesn't fall below the national minimum wage.

Just remember that a new national minimum wage usually comes into play every year in April and is not the same as the national living wage.

The law regarding overtime pay on holiday entitlements

In recent years, various rulings and regulations have shaped how overtime pay on holidays, holiday pay calculations, and other related aspects are determined.

While you are not legally obligated to pay employees for working overtime (unless stated so in their employment contract), you must consider that any worked overtime counts towards holiday pay calculations for those who work overtime regularly.

In 2017, the Employment Appeal Tribunal (EAT) ruled that any regular overtime work must be included in the holiday pay.

Since this ruling on overtime and holiday pay, employers are now required to include overtime pay in at least four weeks of their employees' annual leave pay.

After that employers can choose to include this extra pay into the remaining 1.6 weeks of statutory annual leave and for any contractual holiday that is more than the statutory minimum or to pay their basic rate.

This is because holiday entitlement is made up of a minimum of four weeks annual leave at the normal rate of pay (derived from EU law), plus a minimum of 1.6 weeks at the basic rate (based on UK law). This 5.6 weeks holiday entitlement can include bank holidays.

However, this rule does not apply to workers with irregular hours or part-year workers. These workers must be paid regular and compulsory overtime for all leave at the time it is taken.

Essentially, holiday pay must reflect “normal remuneration”—the money your staff earn when they’re at work.

And, when you calculate your employees’ holiday pay, it must be based on their average pay over the previous 52 weeks, in which wages were payable.

Remember that it's not just overtime that should be included in holiday pay, also look at other payments you make to your employee such as:

• Contractual commission
• Other allowances as per employment terms

The idea is to ensure that holiday pay reflects employee’s regular payments.

Upcoming employment law changes for overtime holiday pay

As the law on overtime holiday pay is constantly evolving, it's best to be prepared and stay informed on any new laws that could be coming into action.

For leave years starting on or after April 1st 2024 new regulations on calculating holiday entitlement for irregular hours and part-year workers will be in play.

These workers will now accrue leave at a rate of 12.07% of the hours worked during a pay period, with rounding based on the amount of time worked. Fractions of an hour that are less than 30 minutes will be rounded down to the nearest hour, while those of 30 minutes or more will be rounded up to the nearest hour.

Employers can either pay these workers when they take annual leave or offer rolled-up holiday pay. Regardless of how you choose to pay these workers for their leave, their holiday pay must be based on the average ‘normal’ pay over the previous 52 weeks in which wages were payable. So, regular overtime must be included for all holidays, not just the 4 weeks.

Staying compliant with employment law is essential to avoid legal repercussions and maintain positive relationships with your employees. You should regularly review your holiday pay policies and practices to make sure they align with the latest regulations and rulings.

How to calculate holiday pay including overtime

To calculate overtime holiday pay, you need to consider the employee's average weekly pay over a specific reference period. This reference period should be the previous 52 weeks in which wages were payable and include all additional hours worked during this time frame.

It's essential to consider any variations in hours worked and payments received during this period to make sure your calculations are accurate. If the employee has not worked a full 52 weeks yet, base this on the weeks worked so far.

Add up the total pay received over the 52-week reference period. This total should include regular components of pay such as basic pay, regular voluntary overtime, compulsory overtime, and any non-guaranteed overtime if it's a regular part of the pay. Exclude any weeks where no pay was received.

To find out an average week's pay, divide the total pay by 52 (or the number of weeks in your reference period if less than 52). This figure is the average working week amount that should be used to calculate holiday pay.

For a more in-depth look at holiday pay calculations, check out our article on How to calculate holiday pay.

What happens if your overtime holiday pay calculation is wrong?

If you make a mistake when calculating an employee's holiday pay, your employee can make a claim for unlawful deduction of wages to the employment tribunal.

This claim can be made within three months of the underpayment. So, for example, if you underpaid your employees in June, they have until the same date in September to make their claim.

For overtime holiday pay backdated, there's a two-year limit that applies when employees are creating a chain of underpayments for backdated holiday claims.

To avoid legal disputes, you should ensure that you are calculating holiday pay correctly and including any non-guaranteed overtime that an employee regularly works.

This can be a complex area of employment law, so it's worth seeking professional advice if you're unsure about how to calculate holiday pay for your employees.

How BrightHR can help you with overtime holiday pay

Understanding the law around overtime and holiday pay is crucial for you as an employer to ensure compliance and fair treatment of your employees. By adhering to the regulations referred to in this guide and staying updated with any changes in legislation or rulings, you can effectively calculate holiday pay, including overtime, and uphold the rights of your workforce.

BrightHR offers a 24/7 employment law advice line, giving you access to a confidential team of qualified experts without the hefty legal fees. Plus, an HR document library with hundreds of policies, templates, guides and more such as:

• Letter to inform staff of changes to holiday calculations
• Guidance note on the changes to holiday entitlement and pay in 2024

Our HR software also comes with an overtime tracker, so you get a clear view of extra hours worked and pay rate making calculating holiday pay on overtime easier. Plus, it's seamlessly integrated into our payroll navigator where you can generate and download accurate reports. Giving you confidence, you've ticked all those legal boxes with expert advice.

There is also nothing quite like a holiday planner that makes automatic holiday calculations for you. Our smart staff holiday planner saves you time and gives you peace of mind that your calculations are in line with the law.

Remember, compliance is key to fostering a positive and productive work environment while avoiding legal issues.

Frequently asked questions

Our customers ask a lot of questions about calculating holiday pay. We’ve answered some of the most common ones below.

Are there any exceptions involving overtime and holiday pay?

Yes, in the UK, overtime that employees work on a "genuinely occasional and infrequent basis" only, as Acas puts it, doesn’t need to count as part of a statutory holiday pay calculation.

What makes up holiday pay?

Holiday pay should include basic rate, regular overtime, results-based commission, and allowances. Expenses are excluded but any additional taxable remuneration should be included. Overtime and commission are only included for the first 4 weeks of leave taken in the year.

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