Overtime Holiday Pay

A recent ruling means that 1 in 6 UK employees will be entitled to enhanced holiday pay and may be able submit backdated holiday pay claims. Previously only basic pay was considered when calculating holidays but now overtime, bonus payments and commission must be taken into account when calculating holiday pay. What are the implications for UK businesses and how can they limit their exposure to backdated claims?

The UK Employment Appeal Tribunal’s holiday pay ruling in November sent shock waves around UK businesses. It ruled that non-guaranteed overtime should be factored into holiday pay calculations and that employees have the right to claim for backdated underpayments of holiday pay. The main points of the ruling are:

  • Any non-guaranteed overtime that was worked by the employee in the 12-week period before the holiday must be taken into account.
  • The ruling applies even where overtime is voluntary and where it is not guaranteed
  • It only applies to the first 4 weeks (including bank/public holidays) of holidays taken in each holiday year, any remaining holidays can be based on normal basic pay.
  • If there is a break of 3 months between successive underpayments then the amount which an employee can recover may be limited or the claim may be out of time entirely

It must also be noted that in May last year the European Court of Justice ruled that commission and bonus payments should also be factored into holiday pay calculations.

The reasoning is that workers should not be financially penalised for taking annual leave by receiving less than “normal remuneration” during their leave.

There was some good news for employers as the UK Government recently ruled that backdated holiday pay claims are limited to two years not fifteen as initially feared. However, the two year limitation period does not apply to claims lodged before July 2015, therefore employers can expect a deluge of claims between now and then.

If your business has employees in receipt of non-guaranteed overtime then you have the following options:

  • You can keep the status quo and do nothing but this could result in a claim and impact on employee relations – not the best option!
  • Calculate the average of relevant pay over the previous 12 weeks and pay all leave at the same rate
  • Have a two tier method of calculating holiday pay (payment for the first 20 days only and then a different method of payment for holiday over and above 20 days)
  • Paying an additional percentage of all non-guaranteed overtime undertaken by the employee reflective of their statutory annual leave entitlement (this would need to calculated carefully).

You will also need to consider whether you budget in the current financial year for any valid claims your employees may have for backdated pay.

In order to minimise the financial impact greater consideration will now have to be taken when granting holidays especially during periods of high overtime. Alternatives to overtime should also be considered e.g. use of agency or bank staff to cover additional hours.

This ruling has serious ramifications for UK employers and should not be ignored. Solve.’s expert team can advise you on how to negotiate this complex issue and safeguard your business from holiday pay claims.