Holiday pay must be calculated on the basis of the employee’s normal pay. Where an employee normally works overtime, this should be included in the calculation of his or her holiday pay.
Overtime that the employer is contractually obliged to offer and that the employees are required to work must always be included in holiday pay.
Recent cases have highlighted the need to ensure that regular overtime, even if it is not guaranteed but employees are required to work when it is offered, must also be included.
There is no definition setting out how regularly overtime must be worked for it to be included, but the general principle is that pay that is “normally received” should be included in holiday pay.
If an employee has worked a settled pattern of overtime over a period of time, payment for that overtime is pay that the employee normally receives and must therefore be included in holiday pay. Where there is no settled pattern the employer should calculate average pay over a reference period leading up to the period of annual leave.
Currently the courts have yet to address what a suitable reference period should be.
Case law has not yet determined whether or not overtime that is voluntary must be included in holiday pay. However, it is likely to come down to whether or not the employee regularly works voluntary overtime, so that overtime pay is routinely expected as part of the employees normal pay.