Holiday Pay and Overtime In The UK - Your Questions Answered

Oli Robertson
Last updated on September 21, 2023

Overtime holiday pay is a tricky topic. In short, employers should remember that regular overtime needs to be included in holiday pay. But a number of updates to legislation over the past few years has meant that the way it is calculated has changed, and the law continues to evolve. There have been several high profile court cases involving British Gas, Harpur Trust and others, where employees have taken their employer to court over holiday pay on overtime and won. 

Additionally, there are different types of overtime to consider, as these can count towards holiday pay 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 obligations around holiday pay, overtime and employment legislation.

What are the different types of overtime?

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

  • Voluntary overtime: Employers aren’t obliged to offer it, and if you do, an employee doesn’t have to accept it.

  • Compulsory overtime: One to include in your employment contracts. You’re required to offer this to your employees and they have to accept. For example, if a particular element of the job has required them to work additional hours outside of the standard contracted hours. Typically this would be anything over 48 hours in a week (unless specified in the contract), but to do so employees have to opt-out of the working time directive that waives their right to working no more than this amount of time in a week.

  • Non-guaranteed overtime: A kind of middle ground between voluntary and compulsory. This is a type that you’re not obliged to offer, but when you do, an employee must accept it.

There is also time off in lieu, 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 overtime pay.

Which ones need to be included in holiday pay? And do 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 rules, 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 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 overtime should be factored into holiday pay calculation. For part-time or shift workers, the calculation changed as part of an April 2020 ruling that states it 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.

overtime holiday pay

What are the new rulings on overtime and holiday pay in the UK, and what do they mean?

In addition to the April 2020 ruling, there were some updates that took effect for the start of the 2023/24 tax year that employers should consider when calculating overtime holiday pay. 

  • The National Living Wage (for those aged over 23), as well as the National Minimum Wage (under 23 or apprentice), have both risen by around 10%.

  • 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.

Hourly rate from April 2023Previous tax year (April 2022 to March 2023)Increase
National Living Wage£10.42£9.509.7%
21-22 Year Old Rate£10.18£9.1810.9%
18-20 Year Old Rate£7.49£6.839.7%
16-17 Year Old Rate£5.28£4.819.7%
Apprentice Rate£5.28£4.819.7%
Accommodation Offset (daily rate)£9.10£8.704.6%

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 bring an employment tribunal claim. So for example if you underpaid an employee on 30th September, they’ll need to make a claim by 30th December. For backdated overtime holiday pay, a 2-year limit applies when employees are demonstrating a string of underpayments for a claim.

Are there exceptions to holiday pay overtime rules?

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.

holiday pay overtime

How should overtime holiday pay be calculated?

We have written a comprehensive guide to calculating holiday pay for your staff, including overtime. Where employees don’t work a fixed number of hours, or their hours vary from week to week, then you’ll need to work out the average pay for the previous 52 weeks. Holiday pay should include:

  • Contractual commission

  • Voluntary, compulsory or non-guaranteed overtime

  • Any bonuses

  • 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.

To find out more, book in a short demo with a product specialist below.

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