Firms Should Factor in Overtime When Calculating Holiday Pay

The Employment Appeal Tribunal (EAT) ruled on 4th November that companies should factor in overtime when calculating holiday pay, a controversial move that has been rebuffed by business leaders but celebrated by workers.

The ruling stems from three cases in which workers sued their employers, arguing that although they consistently worked overtime, it was not included when their holiday pay was calculated and, as a result, they received considerably less pay while on holiday compared to when they were working. The employees won their cases and the EAT rejected the employers’ appeals, concluding, for now, that overtime should be considered part of an employee’s normal pay. However, the ruling could still be brought to the Court of Appeal, meaning a final decision could be years away.

To curtail the potential for backdated holiday pay claims, the EAT ruled that employees cannot claim anything more than three months after their last underpaid holiday. Going forward, employers should decide how to deal with existing claims—all of which have been stayed pending the outcome of a likely appeal. Employers will also need to decide what constitutes normal salary to correctly calculate holiday pay. To cut overtime and holiday costs, employers should consider restructuring working arrangements or relying on bank or agency staff.