News & Views

Holiday Pay and Overtime

BY Gerry O'Hare
Employment law
BG Purple

Yet another case has been reported which casts doubt on what was thought to be a well established principle when dealing with holiday pay; in this case, how to treat overtime payments.

Under the Working Time Regulations, holiday pay is based on an employee’s “normal working hours” and “a week’s pay”.  Where an employee has contracted working hours, holiday pay is based on these hours.  Overtime pay is ignored, unless overtime is guaranteed and the employee is contractually obliged to work these hours.  Voluntary overtime has traditionally been excluded.  Only where an employee has no set working hours would an average wage be used (based on earnings over the previous 12 week period).

However, the case of Neal v Freightliner, has thrown these well established rules into some confusion.  In this case, the employee was employed on a 35 hour a week contract with overtime as necessary.  The employee regularly worked additional hours each day to cover for colleagues and was paid overtime.  He argued that his holiday entitlement should reflect the regular overtime he worked.  He employer argued that, as overtime was generally voluntary and not guaranteed under the contract, it should be excluded from the calculation.

The employment tribunal found for the employee.  Applying European case law, they found that holiday pay should be based on both basic pay and other pay “intrinsically linked” to the work; in this case the overtime pay.

Before employers rush to apply this principle it should be borne in mind that the decision is that of an employment tribunal and as such is not technically binding on any other tribunal.  Until the matter is determined by a higher court, there will remain some uncertainty over what should be included in holiday pay.  It is, however, arguable, that employers may have to include regular overtime pay when calculating holiday pay and should take care if challenged on this by employees.

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