Top Ten Tips: Including overtime in holiday pay

Joanna Dodd
Joanna Dodd
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A November 2014 Employment Appeal Tribunal ruling means employers should include overtime and additional allowances in holiday pay. Joanna Dodd, senior associate in Clarion’s employment team, gives tips on addressing the changes.

1. Assess your risk. Check if you have workers who regularly work non-guaranteed overtime or are paid additional allowances. Look at a an example employees’ annual salary versus basic salary, calculating 20 days’ holiday at the higher rate. Multiply the difference by the number of staff working overtime for a basic financial impact sum.

2. Consider whether to act now. Decide whether to include additional variable pay in holiday pay or wait for a potential appeal. If you wait, make provisions in case the law is unchanged.

3. Include overtime. If you decide to act now, take into account any overtime an employee is required to work when calculating statutory holiday pay.

4. Review other allowances. Factor in allowances that are more than expenses, such as commission. Additional benefits should be included in the first four weeks of annual leave.

5. Consider the reference period. The new law requires you to pay workers ‘an average’ of their normal pay. UK law on holiday pay generally uses a 12-week average. It has been suggested by the Advocate General that a 12-month reference period would be more appropriate. For the moment, consider how a 12-week period will affect your business.

6. Check your payroll software. Calculating average pay over 12 weeks prior to each period of annual leave is not practical for many. Payroll software may be able to do this.

7. Look at ways of limiting the impact. The ruling may make it undesirable to rely heavily on overtime. Other options, such as using bank or agency staff, may now become cheaper alternatives.

8. Consider settling any existing claims. The ruling limits workers’ ability to claim back pay. Workers who have already brought claims may be more willing to settle them at a lower value.

9. Take additional cost into account for budgeting/salary reviews. Most employers will not be able to afford the costs without making savings elsewhere. Consider where you will find the extra money.

10. Consider taking specialist advice. The legal position on this complicated ruling is still unclear. Getting it wrong could lead to a huge financial liability so it is worth obtaining the right advice.