The summer holiday season is upon us. The issue of calculating holiday pay entitlement is often not straightforward. Employees have an entitlement to 5.6 weeks’ paid holiday in a year. A week’s pay is either:-

1.  The employee’s normal rate of pay where the pay does not vary from week to week,; or
2. The average pay over the previous 12 weeks if the hours of work and rate of pay varies from week to week

Traditionally overtime has not generally been included in calculating holiday pay for employees with normal working hours who work overtime from time to time. It had been considered that only where overtime was contractually guaranteed should it be taken into account in calculating holiday pay.

However, a decision of the European Court of Justice indicated that supplementary payments should be maintained during annual leave where they are “intrinsically linked” to the performance of the employee’s contractual obligations.  In practice, this may include bonuses, commission and overtime pay.

This decision has been followed by an English Employment Tribunal who found that an employee was entitled to have overtime payments taken into account when calculating holiday pay. The matter is complicated further by the fact that the Tribunal found that the entitlement to have overtime taken into account only applied to the first 4 weeks of annual leave (which is the minimum required to comply with the EU Directive) and not the next 1.6 weeks (which are granted by UK law).

Decisions of Employment Tribunals are not binding on later cases and there have been subsequent cases where Employment Judges have found that overtime should be taken into account and others where the Judge has decided that it should not. The position will become clearer when the Employment Appeal Tribunal decides on the issue when some of the cases are appealed to it.

So, in light of the uncertainty, what should an employer do? On the one hand, beginning to take overtime into account may reduce the risk of unlawful deductions from wages claims. However, on the other hand, it may create an unnecessary contractual entitlement to overtime being taken into account in the future if the Appeals Tribunal decides that this is unnecessary.

If an employer awaits clarification from the higher courts and Tribunals, it should be kept in mind that if it becomes clear that employees are entitled to have overtime taken into account in calculating holiday pay, the risk of claims for unlawful deductions from wages may increase.

Unfortunately, as is often the case with employment law, there is no easy answer to this question and legal advice should be sought in relation to each specific case.

Collective Questions is intended as a guide and for general information only and is not a substitute for taking specific advice relating to your situation. For specific advice regarding this or any other issue relating to employing people, please do not hesitate to contact us.