UK holiday pay calculations: when overtime forms part of your normal pay
Holiday pay is an area that still causes confusion for many UK employers and employees. One of the most misunderstood points is this:
If an employee regularly works overtime, that overtime may need to be included when calculating holiday pay.
This can come as a surprise, particularly where contracts state ‘overtime is not guaranteed’ but employment law looks at what happens in practice, not just what’s written in the contract.
Let’s break it down.
The Legal Framework
Under UK employment law, holiday pay for at least the first 4 weeks of annual leave (derived from EU law) must reflect an employee’s “normal remuneration”.
Over time, the courts have made it clear this can include:
- Regular overtime (even if not guaranteed)
- Regular commission
- Certain allowances linked to the role
The key test is regularity. If overtime is worked often enough that it has become part of the employee’s normal working pattern, it should usually be included in holiday pay calculations.
At its heart, UK holiday pay law comes from the Working Time Regulations 1998 (WTR), which implement the Working Time Directive (WTD). The WTD entitles workers to at least four weeks of paid holiday at their normal rate of pay.
Two key principles underpin the inclusion of overtime in holiday pay:
- In British Airways plc v Williams (2011), the European Court of Justice (ECJ) held that holiday pay must reflect normal remuneration i.e. pay linked intrinsically to performance of contractual duties, not just basic salary.
- In Bear Scotland Ltd v Fulton & others (2014), the Employment Appeal Tribunal (EAT) confirmed that regular non-guaranteed overtime should be included in holiday pay if it forms part of normal remuneration.
Whether overtime is “regular” and “normal” enough to count will be decided on the facts of each case. The pattern and consistency are the key tests.
Worked Example: Regular Overtime and Holiday Pay
Let’s assume the following:
- Contracted hours: 35 hours per week
- Holiday entitlement: 28 days per year (5.6 weeks)
- Hourly rate: £15
Overtime worked: An extra 10 hours per month (consistent pattern)
There are roughly 4.33 weeks in a month, so:
10 overtime hours ÷ 4.33 = 2.3 hours per week
This gives an effective average working pattern of:
35 contracted hours + 2.3 overtime = 37.3 hours per week
Hourly rate: £15
- Base contracted pay per week:
35 × £15 = £525
- Overtime earned per week (2.3 hrs × £15):
= £34.50
Average weekly pay = £559.50
Because these overtime hours are regular and predictable, they form part of normal remuneration and, under the principles above, must usually be included when calculating holiday pay for at least the first 4 weeks’ statutory leave.
For statutory holiday (4 weeks):
- Each week of holiday pay should be calculated on £559.50
- If the employer had ignored the overtime and simply used contracted pay (£525), the employee would lose roughly £34.50 for each week of statutory leave.
For the additional 1.6 weeks (to reach the full 5.6 weeks entitlement), UK domestic law may allow a different calculation. But many employers choose to apply the same principle throughout the year for fairness and simplicity.
Key Takeaways
✔ Holiday pay must reflect “normal remuneration” not just basic contracted pay.
✔ Regular overtime can count, even if the contract describes it as voluntary, if it is predictable and consistent in practice.
✔ This generally applies to the first four weeks of statutory holiday, but can influence how employers choose to pay across the full entitlement.
✔ Employers should average overtime over an appropriate reference period (typically 52 weeks) to reflect normal pay accurately.
Why It Matters
Getting holiday pay wrong, especially where overtime is excluded, can create risks of claims for unlawful deductions from wages, and potentially back-dated liabilities. The law is evolving, but case law clearly points to a fairer reflection of real pay patterns rather than rigid application of contracted hours.
How JP Blackmoor can help
We run your payroll using specialist software, ensuring accuracy and compliance. We handle payslips, RTI submissions, pension enrolment and communications, leaving you free to focus on your business.
If you’d like help with your payroll, please get in touch.
