Overtime and Holiday Pay: Ensuring Employee Rights and Business Success

Overtime working and holiday pay are crucial aspects of employment law determining how much an employee should be paid for working extra hours and how much time off they are entitled to. The UK government has set the minimum holiday entitlement for full-time employees at 28 days, which includes eight bank holidays. However, the rules around overtime pay and holiday entitlement can be complex, and it is important employers and employees understand their rights and obligations to ensure they are applied correctly.

In recent years, there have been several high-profile legal cases brought by employees regarding overtime pay and holiday entitlement and a recent ruling by the Supreme Court has now found that working overtime should count towards an employee’s holiday allowance. Employees who regularly work overtime should therefore receive additional paid time off to compensate for the extra hours they work. To avoid potentially costly tribunals, employers must ensure they are complying with these rules and giving employees the correct holiday entitlement.

Understanding Overtime Working 

Overtime working refers to any additional hours worked by employees outside of their standard working hours, which can be voluntary or mandatory, depending on the employer’s policies and the employee’s contract. Employers are required to compensate employees for additional hours worked with overtime pay, the rate of which can vary but is usually higher than the standard hourly rate.

The Working Time Directive sets out the maximum number of hours that employees can work in a week, stating this should be no more than 48 hours per week on average, including any overtime hours. Employees can, however, choose to opt out of this limit if they wish to work more hours.

Under UK employment law, employees are entitled to a minimum of 5.6 weeks of paid holiday per year, comprising 4 weeks of annual leave, as stated in The Working Time Directive, with an additional 1.6 weeks under statutory regulations. Employees are entitled to a week’s pay for each week of statutory leave they take, and overtime pay may be included when calculating holiday pay.

In 2017, the Employment Appeal Tribunal (EAT) ruled that employers must include regular voluntary overtime in holiday pay calculations. It should be noted, however, that this applies only to the 4 weeks of annual leave. In recent years, several court cases have served to highlight why employers must take care when calculating holiday pay, especially around overtime. In the case of Bear Scotland Ltd, for example, the EAT ruled that all regular overtime must be included in holiday pay calculations. This also applies to commission if it is a regular part of the normal payment.

In 2020, another ruling stated that part-time or shift workers with variable hours have their holiday pay based on their average pay over the previous 52 weeks instead of 12, as it was previously. Additional updates took effect at the start of the 2023/23 tax year around the National Living Wage and National Minimum Wage introduced further considerations for calculating overtime holiday pay.

Employers can choose to include overtime work in an employee’s contract, specifying the rate of pay and any limits on the number of hours worked. They must, however, pay their employees correctly for any additional hours worked, while employees should have a sound understanding of their contract and their entitlement to overtime pay and holiday allowance.

Employer’s Perspective

Overtime can be an essential part of keeping a business running smoothly and meeting its demand, but many examples exist that demonstrate that it can also be a source of confusion and potential legal issues when it comes to holiday allowance.

Whilst legislation continues to evolve, employers must keep pace with their legal obligations and ensure they accurately calculate holiday pay for employees who work overtime. The recent Supreme Court decision to include regular allowances, overtime, and commission in holiday pay calculations has significant implications for employers. Employers who did not adjust their calculations may now face greater liability, although firms in England, Scotland, and Wales are protected by the two-year limit to claims outlined in the Deduction from Wages (Limitation) Regulations 2014.

The ruling also means that the “three-month gap” rule cannot be used by employers in claims about any kind of underpayment, allowing workers to make claims for historic deductions regardless of whether they were more than 3 months apart. Additionally, the Supreme Court has ruled that each day’s leave is a composite of Working Time Directive leave, UK statutory leave, and contractual leave, adding complexity to carry forward and pay rules.

The Importance of Compliance

UK employers must continue to ensure they correctly calculate and pay their employees for any overtime worked. While the recent ruling may mean that some employers will have to pay more in holiday pay, it is a positive step towards ensuring that employees are receiving their fair entitlements. By complying with these regulations, employers can ensure they are providing employees with a fair and supportive work environment, which ultimately leads to increased job satisfaction and enhanced productivity.

To ensure compliance, employers should assess how holiday has been calculated in the past to aid their understanding of what could now be in the scope of an unlawful deduction from wages claim and review payroll processes and software to ensure all overtime is accurately recorded and calculated in future.

Increased awareness of the rules gave rise to multiple cases being brought against employers, but the recent win for employees may see a more widespread recognition that their rights are being recognised, and fair practices have been put in place.

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Authored by

Andrew Leaitherland
Andrew Leaitherland Founder and CEO
Although Andrew is an employment lawyer by training, over the last fifteen years he has built up extensive experience in leading M&A activity with professional services firms including leading the listing of DWF Group plc on the main market of the London Stock Exchange. Andrew uses these skills to advise strategically on inorganic growth opportunities for all types of professional services businesses, in conjunction with other members of arch who support on the necessary legal work. Andrew is also the Chair of The Legal Director and a NED of Summize which gives him great insight into how the respective businesses can collaborate to further the interests of our clients.

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