How to manage holiday pay and overtime in the UK?

Overtime holiday pay is a tricky topic for employers. In short, from a legal point of view, employers need to remember that regular overtime needs to be included in holiday pay, to accurately reflect an employee’s normal remuneration. But a number of updates to employment law concerning working time over the past few years has meant that the way holiday pay is calculated and affected by overtime work has changed, and the regulations continue to evolve. There have been several high-profile court cases involving, for example, British Gas, and Harpur Trust, where employees have made legal claims against their employer over holiday pay and overtime, and won their cases. 

Additionally, there are different types of overtime to consider, as these can count towards a worker’s holiday pay entitlement in slightly, but crucially, different ways.

We’ll break it all down for you here and include details on the recent changes, so you can meet your legal obligations around holiday pay and overtime, and thus ensure full compliance with employment regulations.

What exactly is overtime holiday pay in simple terms? 

Overtime holiday pay means that if an employee regularly works overtime, their employer must include the earnings from that overtime when calculating their holiday pay.

This ensures that the pay an employee receives while on annual leave reflects their normal remuneration for work. This rule applies to regular voluntary, compulsory, and non-guaranteed overtime, but only for the first four weeks of an employee’s holiday entitlement.

What is the difference between regular overtime and irregular overtime from a legal standpoint?

In current UK law, there is no precise, statutory definition of what makes overtime “regular”. The term isn’t defined by an Act of Parliament that says, for example, “regular means overtime worked more than once a month”.

Instead, the definition has been developed through a series of court cases (case law). The line between “regular” and “irregular” is a question of fact and degree based on the individual circumstances.

The “Sufficiently Regular” principle

The key legal principle is that overtime payments must be included in holiday pay if they have been paid over a sufficient period of time to have become a normal part of the employee's pay.

Here’s where the line generally falls:

What is likely regular overtime?

Overtime is generally considered regular if it forms a settled pattern. This does not mean it has to be worked every single week or month. Examples include:

• overtime that is worked a few times a month

• a recurring pattern, such as an employee who works overtime one week in every four

• persistent overtime over a significant period, even if the number of hours varies

• overtime that is a predictable and recurring feature of the job, even if it's technically voluntary

What is likely irregular (or occasional) overtime?

This is overtime that is so infrequent or exceptional that it cannot be considered a normal part of the employee’s pay.

For example, an employee staying late on a single occasion to finish an urgent, one-off task that is not expected to happen again.

In short, if an employee has a reasonable expectation of continuing to receive pay for working overtime, it is likely to be considered “regular” and must be included when you calculate their holiday pay.

What are the different types of regular overtime? 

When it comes to overtime and holiday pay in the UK, there are three different types of overtime work that employers should be aware of, as well as their implications for calculating everything correctly for every worker.

• Voluntary overtime: Employers aren’t obliged to offer or pay voluntary extra hours of work, and if they do, employees don’t have to accept them.

• Compulsory overtime: This is one to be included in workers’ employment contracts. The worker is then required to accept these additional work hours when offered. For example, if a particular element of the job requires them to work additional hours outside the normal contract hours. This may be over the normal, legal standard of a 48-hour work week, but, in order to work this extra work time, the employee would first have to opt-out of the working time directive, therefore waiving their legal right to work no more than this total amount of time in a week.

• Non-guaranteed overtime: This is a kind of middle ground between voluntary and compulsory overtime. This is a type of overtime that, as an employer, you’re not obliged to offer, but when you do, an employee must accept it. This arrangement must be a term in the employee’s contract of employment.

There is also time off in lieu (TOIL), in other words, time off given when an employee has worked over and above the contracted hours. It’s a way for employers to give employees annual leave instead of paid overtime, and is a separate arrangement from holiday pay calculations.

Which types of overtime need to be included in holiday pay calculations? And can you accrue holiday on overtime?

Since 2017, when the Employment Appeal Tribunal (EAT) made a ruling on overtime and holiday pay, any regular voluntary overtime must be included within holiday pay. If we add together the minimum legal requirement of 4 weeks annual leave that employees are entitled to, plus the extra 1.6 weeks granted under UK statutory regulations, then we get 5.6 weeks as the minimum holiday entitlement. Remember though that overtime only needs to be included when calculating holiday pay for 4 of those 5.6 weeks of entitlement.

There have been several legal cases in recent years, where employees have taken their employers to court over holiday pay, and won. So, in short, employers need to be very careful when calculating holiday pay, especially around overtime.

In the case of Bear Scotland Ltd, an employee called Mr. Fulton claimed that his company had made unjustified deductions from his wages by not including overtime and other associated payments in calculating how much holiday pay he was owed. As a result, the EAT ruled that all regular overtime that employees are required to do if requested should be included in holiday pay calculations.

So, in short, all of the above types of regular overtime should be factored into holiday pay calculations. This ensures, as per current UK law, that pay for the first four weeks of holiday reflects “normal remuneration”, including regularly worked overtime, while genuinely one-off, infrequent overtime is not required to be included.

Note that, for part-time and shift workers, the calculations changed as part of an April 2020 ruling, under the Good Work Plan, that stated they must be based on the previous 52 weeks of pay, not the 12 weeks as it was previously.

Commission, if a regular part of normal payment, should also be included in your overtime holiday pay calculations.

How did the 2024 overtime and holiday pay legislation affect UK businesses? 

The start of 2024 brought significant changes to holiday pay calculations in the UK: 

• As of 1st January 2024, there is now clearer guidance on including overtime and commission in holiday pay calculations.

• For irregular hours and part-year workers, holiday entitlement is now calculated as 12.07% of actual hours worked in a pay period. This is particularly relevant for those on zero-hours contracts.

• These changes to the law aim to simplify calculations for each employee, while ensuring workers receive fair compensation for overtime worked.

• The regulations particularly affect businesses with seasonal workers, or those who frequently offer overtime.

How do the 2025-2026 pay rate increases affect holiday pay calculations? 

In addition to the 2020 and 2024 rulings, there have also been some updates taking effect from the start of the 2025-2026 tax year and from April 2025 that employers should consider when calculating overtime holiday pay. These involve a rise in National Living Wage and National Minimum Wage rates.

• The National Living Wage (for those aged over 23) and the National Minimum Wage (for those under 23, or apprentices) have both risen.

• These updates mean that for those on the Minimum or Living Wage, any holiday pay due on overtime will be more than it was for the equivalent time worked previously.

The new rates are as follows:

What happens if an employee brings a claim of overtime holiday underpayment? 

An employee has 3 months minus 1 day from a suspected underpayment to begin legal proceedings with an employment tribunal claim against their employer. So, for example, if you underpaid an employee on 30th September, they’ll need to make a claim by 29th December. For backdated overtime holiday pay, a 2-year limit applies when employees are demonstrating a string of underpayments for a claim. Remember that failing to properly manage annual leave, including UK bank holidays, can lead to serious compliance issues.

How can an employer ensure compliance with current overtime holiday pay rules?

To stay compliant with the latest UK regulations, employers should: 

• Maintain accurate payroll records of all overtime hours worked by each employer, whether voluntary, compulsory, or non-guaranteed, for every pay period.

• Review payroll systems and processes to ensure they can accommodate the new calculation methods required by the latest regulations.

• Consider the impact on holiday pay budgets, especially if overtime is regular.

• Ensure holiday pay calculations include both regular overtime and commission payments.

Are there exceptions to including overtime payments in holiday pay? 

Remember that only regular overtime has to be included as part of holiday pay. Overtime that employees work on a “genuinely occasional and infrequent basis” (according to ACAS) technically doesn’t need to be included as part of your calculations, but there is no real indication of what this actually means in practice.

In the case of Willets v Dudley MBC, the outcome would contradict this guidance, meaning there is some grey area around what constitutes occasional or infrequent overtime. ACAS’ advice to employers to “take legal advice as to how these decisions will impact on their organisation” is a little unhelpful, but, at the very minimum, you should be factoring any regular overtime into holiday pay calculations.

How should overtime holiday pay be calculated? 

It is crucial to follow best practices for calculating holiday pay for your staff, including overtime. For part-time workers, holiday entitlement calculations are just as important. Where employees don’t work a fixed weekly number of hours, with hours therefore varying from week to week, then you’ll need to work out the average pay for the previous 52-week reference period. 

Your holiday pay for overtime calculations should include: 

• contractual commission

• voluntary, compulsory, and non-guaranteed overtime

• any bonuses

• any travel allowances

Make overtime holiday pay calculations swift and easy

Thankfully, PayFit’s payroll software makes holiday pay calculations, including overtime, simple and straightforward. 

Whereas most software or payroll bureaus don’t include overtime holiday pay functionality within their offering, PayFit lets you look back up to 104 weeks in order to retrieve up to 52 weeks of pay you can use.

The platform then calculates the average daily rate for you, so there’s no room for error. What’s more, employees have their own login to log any leave, meaning that admins can see payslips update in real time (employees see it when their payslip is released on payday), which helps to improve trust and transparency between employer and employee.

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