Holiday pay – All change again

The calculation of holiday pay for employees and workers who undertake voluntary overtime is quickly becoming a very common issue for many employers. We’ve been running a Blog on the subject updating it as the law regularly changes (link below).

The position is clear for employees who work obligatory overtime. These employees are entitled to have that overtime taken into account when calculating holiday pay. This also applies where the employer is not obliged to offer overtime but, when it does, the employee is obliged to undertake it.

The situation is less clear for voluntary overtime (i.e. where the employer is not obliged to offer it and the employee is not obliged to do it). Following the Employment Appeal Tribunal’s decision in Dudley Metropolitan Borough Council v Willetts and others, voluntary overtime must be taken into account when calculating holiday pay, where the overtime is “normally undertaken”.

“Normally undertaken” is defined as “if they are paid regularly or repeatedly [for overtime] over a sufficient period of time to amount to normal remuneration”. This is unfortunately not particularly helpful, as it is a matter of fact whether payment for working overtime is ‘regular’ or ‘repeated’.

Where overtime is very rarely worked, it does not have to be taken into account, but unfortunately there is no clear line between ‘regular’ and ‘rare’. Obviously, as employers you have a margin of discretion in deciding where that line is, so that, for example, overtime of less than (say) 10 hours worked is ignored in any 12 week period. However, there is still a risk of a finding that even that level of overtime is ’normal’. Some employers might find it easier to just take the average of overtime paid over the previous 12 weeks as ‘normal’ overtime pay and add 1/12th of that to the normal fixed weekly wage to calculate the week’s holiday pay.

Given the current uncertainty in the law regarding calculation of holiday pay, the most sensible and prudent way to approach the issue is by taking the average of the last 12 weeks’ working hours to calculate a normal week’s pay. We feel that there is a significantly lower chance of this being successfully challenged in the Employment Tribunal.

It is worth noting that including overtime normally worked in holiday pay is only required for the 4 weeks minimum holiday period required by the Working Time Directive. The remaining 1.6 weeks’ leave, provided for under UK legislation, does not have to include non-obligatory/voluntary overtime payments when calculating a week’s pay.

On a slightly similar note, from 6 April 2020, the 12-week reference period used to calculate statutory holiday pay for those not working normal weekly hours will be extended to 52 weeks (or the number of complete weeks for which the worker has been employed, if that period is less than 52 weeks). As such, employers might want to consider adopting that approach now. When looking at that period (12 or 52 weeks), any week in which the employee did not earn anything at all has to be ignored and (if service is long enough) the reference period should be extended. For example, if the employee earned nothing in one of the 12 weeks of the reference period, say for a period of unpaid leave, the calculation should go back to the 13th week prior to taking leave and the average taken of the 12 weeks worked in that period.

Calculating holiday pay

Laurence Dunn, Partner