Updated: 6 things you need to know to take care of the holiday pay and overtime ruling

You may have seen some of the reports from Tuesday’s ruling from the Employment Appeal Tribunal (EAT)  around the fact that employers need to consider overtime when calculating holiday pay so we wanted to set out the facts, some advice and let you know how our payroll software can help you to manage this. This post was updated on 11 November 2014 with further clarification from our legal experts.

6 things you need to know to take care of the holiday pay and overtime ruling

  1. The ruling from this week’s Employment Appeal Tribunal (EAT) means that all elements of an employee’s “normal remuneration”* should be taken into account when calculating holiday pay.   The EAT considered that payments for non-guaranteed overtime – overtime that an employee is contractually obliged to work if offered it, but which it is not obliged to offer – should be included as it forms part of an employee’s normal pay.
  2. The judgment did not consider whether payments for voluntary overtime have to be included.  This question may have to be tested in future tribunals.  It is also possible that where overtime is not worked regularly it does not have to be included.
  3. Overtime and commission earned by your employees only has to be included when calculating holiday pay for the basic four week statutory holiday entitlement under the Working Time Directive
  4. Employers do not have to include overtime when paying holiday pay for the additional 1.6 week’s holiday provided by the Working Time Regulations or for any additional contractual holiday entitlement over and above the basic statutory four week entitlement
  5. Employees may appeal for backdated holiday pay claims but will not be able to if there has been a gap of more than three months since they received their holiday pay.
  6. If you do not to include pay for non-guaranteed overtime and commission payments when calculating holiday pay going forward, an employee may make a claim to the employment tribunal for unpaid holiday pay, but they will not be able to claim if there has been a gap of more than three months since the holiday.

*The Judge said that ‘normal pay’ is simply pay that is normally received by the worker for a sufficient period of time.

Our advice for employers

We would advise you to respond to this new ruling straight away, consider whether your business and employees are covered and whether you should be factoring overtime and commission payments into your holiday calculations with immediate effect.

If you are a Sage customer, find out more on how to manage this within your software or join in the debate on the Sage Business Community (login required).

If you’re not a Sage customer find out more about how our payroll software can help you, here.

  • David

    I disagree with the Sage advice – the law has not changed and 1 tribunal judge’s interpretation does not override legislation passed by Parliament – the Court of Appeal may uphold the ruling in which case there is a greater chance that it should become the norm. More likely is that emergency legislation will be enacted to limit the impact.
    Just my opinion

    • Phil Hyland

      David: The underling principles are as follows

      1. Any regulations implementing an EU directive have to implement it correctly.

      2. Holiday pay should be calculated to be normal or average pay.

      3. Any pay intrinsically linked to the task performed under the contract should be included in holiday pay. Therefore whether overtime is voluntary, involuntary or performed at gun point is neither here nor there. It is the payment that is reckoned.

      4. There should not be any financial disincentive to taking holiday.

      5. A holiday reference period needs to be long enough to be representative.

  • SBB

    I feel you have missed a vital piece of information here – the ruling only applies to COMPULSARY overtime, i.e. overtime which is either required by the contract of employment or by custom and practice. If an employee works voluntary overtime this will not count. It is a very important distinction.

  • SBB

    In agreement with you Paul – this was explained very clearly on Radio 4 a few days ago. I am disappointed with Sage for making a scaremongering statement such as this.

  • HELEN

    How would the holiday pay been calculated for instance if the employee worked 6 hours o/t and there basic was 39 hours would they be entltled to 45 hour holdiay pay?