This is the email I just sent to a client who is unsure if they are paying correctly when it comes to holiday pay.
Is it any wonder employers get confused and get stuff wrong sometimes …?!
The problem is that the rules around holiday pay keep changing!
It was first the case that we only had to include compulsory overtime (overtime that the employer is contractually obliged to offer and that employees are required to work) in holiday pay, then an Employment Appeal Tribunal in 2015 ruled that overtime which is not guaranteed but that employees cannot turn down needed to be included, and then more recent rulings in 2017 now mean that voluntary overtime must be included if it is part of a pattern of work that is sufficiently settled and regular to justify the description “normal”.There is of course no formal definition of what is “normal” and the guidance states it would be down to a tribunal to determine this…however what we do know is that genuinely adhoc or irregular overtime does not have to be included. But overtime that ‘extends for a sufficient period of time on a regular and/or recurring basis’ must be included. If overtime pay has effectively become part of the worker’s normal pay even if the amounts vary then it is likely this needs to be included in holiday pay. This applies if regular overtime is only worked at certain times of the year (such as over seasonal busy times) as well as in cases where overtime is worked regularly throughout the year.
It is of course more complicated than that in that the right to overtime pay to be included in holiday pay only applies to the 4 weeks holiday under the EU Working Time Directive but not the additional 1.6 weeks which was added by the UK legislation in the Working Time Regulations 1998. However most employers we’ve worked with agree that is far too complex to worry about and calculate for all holiday!
And finally, if the overtime is not a settled pattern there is no specific guidance about how, or over what reference period, you should calculate the average overtime pay when working out what to pay when someone is on holiday! Our best guidance is to average it over the twelve weeks prior to someone taking annual leave.
When considering your risks of the situation to date, it is worth noting that employees who have a break of more than 3 months between historic underpayments of holiday pay (i.e. if they took holiday in October but before that the last time they took holiday when an overtime payment should have been included was May), will not be able to successfully argue they have suffered a series of unlawful deductions and so will only be able to claim for the most recent underpayment. However if there is never a three month gap between periods of holiday that should have attracted an overtime payment, the employees can claim a series of underpayments / unlawful deductions. Also note that the tribunals put in place a limitation such that any claims for a series of deductions can only go back a maximum of two years from the last deduction.
CONFUSED STILL?! Many employers are! Give us a call today and we’ll help you work out what you need to do next.