Do you have to include overtime payments in your holiday pay calculation?
As the holiday season approaches, employers need to reconsider how much they should pay their employees whilst they are away.
There have been a number of cases in the UK tribunals and the European Court of Justice over the last year concerning how much a worker should be paid whilst they are on holiday. The outcome of the cases is that workers should be paid ‘pay that is normally received.’ The aim of the legislation is to ensure that there is no financial disincentive to a worker taking holiday.
In this article, we look at what this means for overtime pay.
Types of overtime
The courts have distinguished between three different types of overtime.
Guaranteed overtime is where the employer is required to pay the worker even if there is no work for them to do. This is type of overtime should be included in the holiday pay calculation.
Non-guaranteed overtime is where the worker is obliged to work overtime if required, but the employer is not obliged to provide overtime or pay in lieu. For example, where drivers are employed on a basic eight hour day, but are required to work longer hours if they get stuck in traffic or don’t finish their deliveries. Following the recent decisions, these overtime payments should be included in the holiday pay calculation.
Voluntary overtime is where an employer does not have to provide overtime and the worker is not required to work if asked. For example, if a secretary’s contract states her key hours and then says she may be asked to work overtime from time to time, but is not required to do so. The position regarding voluntary overtime remains uncertain as we don’t yet have a formal decision. However, if one analyses the cases, it seems that where there is a settled pattern of overtime for a significant period, this should be included in the holiday pay calculation. The position regarding one-off or ad hoc periods of voluntary overtime is less clear.
If a worker is entitled to have their overtime pay included in their holiday pay calculation, the next obstacle to overcome is determining how to calculate the correct reference period. If the overtime is regular and consistent, the simplest option is to treat it in the same way as salary.
Where however the overtime is irregular, employers will need to consider what the appropriate reference period is. The European Court of Justice has ruled that this is a matter for national courts to decide but employers need to use an appropriate reference period to achieve a representative average.
Unfortunately, the Working Time Regulations (WTR) do not include a reference period for this calculation so the correct reference period remains uncertain. There is a dichotomy between UK law and the European case law. Under the WTR a 12 week reference period is used for calculating holiday pay for workers who don’t have normal hours and some commentators have suggested that this should be used for calculating overtime pay too. However, the Advocate General has suggested a 12 month reference period would be appropriate, particularly where overtime payments fluctuate throughout the year. There is therefore no firm answer to this question at the moment. What employers should do is to ensure that the period chosen provides a representative average of overtime earned by the worker.
How far back can claims go?
Employers have been concerned at the potential for liability for holiday pay claims to go back to 1998, when the WTR were introduced. However, at the end of last year the government introduced new legislation to restrict the period over which a worker can claim. The Deductions from Wages (Limitation) Regulations 2014 impose a cap of two years on retrospective unlawful deductions claims presented on or after 1 July this year.
What should employers do now?
The inclusion of overtime payments in the holiday pay calculation is not going to go away. Employers should audit the risk to their business now. This will involve looking at the overtime arrangements in place and assessing whether they are guaranteed, non-guaranteed or voluntary. Employers will then need to consider what the appropriate reference period is for their business. In doing so, it is important to eradicate irregularities in overtime payments. Having done an audit, employers will need to decide whether they need to include overtime payments in the holiday pay calculation.