Overtime and holiday pay

The transport and logistics sector relies upon having a flexible workforce, and the ability to require employees to work overtime is key to ensuring that customer demand is met. For employees, it can be a useful source of additional income on top of their basic pay and some employees may become so reliant on this that they are working overtime every week.

But; if you do employ people who regularly work paid overtime, then you need to know about a series of cases over the last few years concerning how much holiday pay they are entitled to.

These cases have considered how much an employee should be paid when they take a week’s holiday where their normal weekly pay varies, including where it does so because of paid overtime.

The law requires employers to pay employees their ‘normal remuneration’ during periods of paid holiday. Many employers in the sector have deemed this to be referring to the employee’s basic contractual hours that they are obliged to work each week.

This has been challenged in the courts because claimants have successfully claimed that to pay them their contractual basic pay only during periods of holiday is a disincentive to take their holiday because they will receive less than they would have done had they worked that week, on the assumption that they would have worked some paid overtime.

This argument only succeeds where the employee can show that they were regularly working paid overtime. It would not apply to one-off or only occasional instances of overtime.

The courts have agreed with the various claimants and it is now clear law that where overtime payments are paid in such a manner and with sufficient regularity to be considered part of the employee’s normal remuneration, then this should be included in the calculation of holiday pay.

The grey area is how often overtime must be worked in order for it to be included. This will be a matter of ‘fact and degree’ to be decided on the facts of each case and at the moment it is difficult to give any further guidance. However, as cases start to be reported, we will get a clearer indication of how regular overtime needs to be in order to be counted.

It is not all bad news for employers. This principle only applies to the four weeks of annual leave guaranteed by EU law each year. It does not apply to the additional 1.6 weeks annual leave granted by UK law or any additional holiday allowance that an employer may choose to give.

What should employers be doing?

Employers who have not already done so should review their current practice for calculating holiday pay to test whether they are compliant and whether they need to change their practices going forwards.

They also need to consider whether they are at risk of any employees bringing claims in respect of historic underpaid holiday. In this respect, the government has legislated to say that such historic underpayment claims can only claim back two years from when the claim is issued.

If you would like more information, please contact Ben Stepney in our employment team.