New rules on holiday pay and overtime payments

We have new rules on holiday pay and overtime payments to consider which have the potential to be problematic for employers where staff regularly receive overtime payments.

By Metis HR.

Previously if you had an employee on a week’s holiday you would pay them their basic pay for that week’s holiday. You would not have calculated any additional payment for overtime payments they would have received if they’d been in work.

The Employment Appeal Tribunal’s decision has changed this (although an appeal to its ruling has already been permitted so things may change again!). It is has ruled that voluntary overtime should count towards calculation of holiday pay, in other words, holiday pay should include overtime payments that the employee would have received if they had been in work.

What does this mean for you as the employer? If you have people who regularly work overtime you need to consider whether you have an obligation to pay them overtime payments when on annual leave.

Your employees are entitled to be paid a sum to reflect normal non-guaranteed overtime as part of their annual leave payments.

You only need pay this for the 20 days’ paid leave that the Working Time Directive awards (the additional 8 statutory days’ paid leave that UK workers are entitled to and any additional contractual leave in excess of the 28 days statutory minimum leave) is not included in the Tribunal’s decision.

When an employee who regularly works overtime requests annual leave you will have to calculate the amount of overtime that they would have worked if they had been in work and add this to their holiday pay (for the first 4 weeks’ of their annual holiday).

Consider whether you need to review the way that you cover additional work. Is it more cost effective to employ more staff, possibly on a part time or zero hours basis, than give regular overtime which you will potentially have to continue to pay a worker even when they are not working? It may be some time before any appeal decision is made. For now, you need to consider the impact of this decision on your organization and what action you are going to take.