Overtime and holiday pay...unravelled

News and Events

Overtime and holiday pay...unravelled

  • Posted

Holiday pay has been in the headlines this week. Reports have stated that 1 in 6 workers or “millions of employees” can now claim extra holiday pay. This is an exaggeration of the actual position, which is a little more complicated, as Tamsin James explains.


Calculating holiday pay is a tricky business at the best of times. It has been made even more complicated recently as the UK and European courts have not been able to agree on the correct approach. This week, a UK court decided that UK rules should be changed so that employers now need to include paid overtime in their calculation of holiday pay. This will affect payroll costs going forward for some employers.

What does it mean for you?
The ruling will affect you (or your employees) if you or they get:-

  • paid regular overtime which cannot be said to be purely “voluntary”
  • fixed commission payments; and/or
  • other payments “intrinsically linked” to work, such as shift allowances, seniority payments and some travel allowances (except where these merely cover expenses).

It may not impact as much as reports suggest because:-

  • The ruling only applies to 20 out of the 28 days statutory holiday per year (it does not extend to the additional 1.6 weeks leave provided for under UK law).
  • Concerns that workers could claim for years of backdated holiday pay are overstated; most workers will only be able to recover underpayments made in the last three months. Note that time limits are tight and any claims for underpayment of holiday pay should be brought within 3 months of the last (holiday) payment.
  • It is not going to be the end of the matter; it is expected that the issue will be looked at by the Court of Appeal and by a Government “taskforce” set up to review the situation.
  • One question that remains unresolved is the period of time used to calculate “average pay”. A 12 week snapshot is usually used but this could now lead to distortions in holiday pay. For example, a retail worker who does a lot of overtime over Christmas could now have a far higher “average pay” if they took leave in January.

Contact Tamsin for more information

Tamsin James
Employment Law Specialist