Holiday pay and non-contractual overtime – the jury is out

At the time of going to press, there has as yet been no firm decision on the question of whether overtime (regular but not part of the contract) should be included in holiday pay calculations.

The matter is in the process of being considered by the Employment Appeal Tribunal (EAT) but it may still be some weeks before we hear their decision. When the decision is made then it is likely to hit the headlines, especially if they rule in favour of including such overtime in holiday pay calculations.  It looked like a foregone conclusion in the light of a recent European decision, but now some weight, not least from the UK Government itself, is being exerted in the opposite direction.

At this point employers may want to assess the implications should the change prove necessary.

  1. How to calculate holiday pay going forward.
  2. Whether to apply any increased rate to just the first four weeks holiday (the “European portion”) or for all the holiday pay. The former would cost less in holiday pay but more in administration.  There may be some further guidance on how to handle this when a decision is announced.

Any back pay provisions seem likely to be heavily resisted by the UK – the CBI has thrown its weight behind that resistance. So at this stage it may be too early to make assumptions about any back pay.

Therefore one option is to “wait and see” what the EAT decides, while preparing for the possibility that holiday pay calculations going forward, at least, will have to be changed.

There is another argument (for each employer to decide) as to whether to make the change in any case.  Three quarters of employees nationally do not take their full holiday entitlement. Whether this is “a good thing” or not depends on your view of the value of holidays to you as an employer. Self-employed individuals fool themselves if they think  they can work for 12 months  and achieve more than working for only 11 months. Much the same applies to employees.

Another consideration might be your employees’ willingness to work overtime. If this is resisted currently then the concept that working overtime will enhance holiday pay may be an incentive.

Employees whose income drops significantly when taking holiday may be particularly discouraged from taking holidays. Some may see that as employers taking advantage, as it reduces overall employment costs. Such discouragement certainly runs counter to European thinking on the matter.

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