Ask the expert: Overtime payments and holiday pay

Q. CAN you advise how my practice should deal with overtime payments in relation to calculating holiday pay? Employees at my practice regularly work overtime and I want to ensure that their holiday pay reflects the work they do. What factors should be considered when calculating this?

A. There has been recent press coverage regarding the case of Bear Scotland Ltd v Fulton, with the question raised of whether overtime payments should be included in the calculation of holiday pay.

In this case, the Employment Appeal Tribunal held that overtime worked, which is compulsory but not guaranteed, should be included when calculating holiday pay. The case also considered whether the overtime worked was sufficiently regular that it can be considered as part of the employee’s normal pay.

However, this only applies to the four weeks of annual leave under the EU Working Time Directive and not to the additional 1.6 weeks’ leave given by the UK government, although employers can choose to apply it to the whole 5.6 weeks if they wish.

The matter of voluntary overtime was not covered – so what should be considered here is whether the overtime could be classed as sufficiently regular. An employee should not be at a disadvantage from taking leave due to financial penalties.

If it is the case that employees do work sufficiently regular overtime, then it needs to be deliberated what reference period would be appropriate to use. This matter was looked at in another case – Lock v British Gas – which dealt with the inclusion of commission in holiday pay.

The court ruled that the reference period should be one that achieves a ‘representative’ average. Under the UK Working Time Regulations, the reference period to calculate an employee’s pay with no normal working hours is 12 weeks but this may not give a true reflection of the employee’s pay, especially if the overtime is seasonal. Therefore, the employer should attempt to find a reference period that fairly covers the employee’s overtime pattern.

It has been previously suggested that employees could backdate claims for underpaid holiday pay. However, the Bear case ruled that if there is a gap of three months between holiday underpayments then such claims will not succeed. The government have also announced that as from July 1, any backdated claims will be limited to a maximum two-year period.

Practices can act now by reviewing staff’s overtime working and establishing whether any employee works regular or frequent overtime. If they do, then practices should find a reference period that is representative to produce an average and then apply this to the four week’s leave.