The Employment Appeal Tribunal (EAT) decided in 2014 that any overtime worked does count towards an employee’s holiday entitlement. Yikes!
What does that actually mean?
It means that if you have in their contracts that they work 20 hours a week, and they work 10 hours overtime every week, then their entitlement will be the same as if you had 30 hours in their contracts.
However, they can’t ever earn more than a full-time holiday entitlement of 28 days (which can include bank holidays), no matter how much overtime they work.
Do I need to worry?
There is, unfortunately, no definition setting out how regularly overtime must be worked for it to be included. The general principle is that pay which 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 they normally receive” and must therefore be included in holiday pay.
A tribunal ruling in 2019 held that voluntary overtime must be included if it is part of a pattern of work that is sufficiently regular and settled for payments made in respect of it to amount to normal remuneration.
Where there is no settled pattern of overtime, the employer should calculate average pay over a reference period leading up to the period of annual leave. However, the courts have not addressed what a suitable reference period would be. I would normally work on a three-month reference period.