Following a ruling from the Employment Appeal Tribunal (EAT), if you have employees earning regular overtime, you will need to allow for this when calculating their holiday pay.
The EAT’s decision means that overtime payments should form part of the holiday pay calculation for those employees. Where there is a settled pattern of overtime – in other words, they work roughly the same number of hours’ overtime each month – they should receive the same amount as usual during their holiday. If there is no settled pattern, but overtime is worked regularly throughout the year, an average needs to be taken over a 13 week period to establish their typical level of overtime payments.
What will this mean for employers?
The ruling will mean that employers need to allow for overtime in holiday calculations for staff who regularly work overtime. That will apply, even if their contracts state that the overtime is not guaranteed.
Higher costs – This is the obvious implication. Companies that regularly pay significant amounts of overtime to staff will have to budget for paying out more in salaries, which could be significant during the summer holiday period.
Backdated claims – The ruling also stated that back pay could be claimed for up to 3 months, if staff received holiday pay without overtime shortly before the ruling. It is still possible that the ruling could be appealed, resulting in an even longer retrospective period, so you should be aware of this.
Revised contracts – It may be good practice to revise your employment contracts and staff handbook to reflect the changes and to explain how holiday pay will be calculated.
What you should consider doing
To help you ensure that you are compliant with the new ruling, the following are steps you may wish to consider taking:
A full review of how and what each member of staff is paid (including details of voluntary overtime, involuntary overtime, commissions, shift allowances and any other pay)
Review and revisions of your staff contracts and employee handbook to ensure that they accurately reflect the rules
Look at staff holiday patterns over the last year, as this will help you manage cashflow during busy holiday periods. During such periods you will now have increased costs, as well as reduced productivity.
Consider getting legal advice if a significant number of your employees work regular overtime.