When does overtime have to be included in holiday pay?
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 employees are required to work must always be included in holiday pay. In Bear Scotland Ltd and others v Fulton and others; Hertel (UK) Ltd v Woods and others; Amec Group Ltd v Law and others  IRLR 15 EAT, the Employment Appeal Tribunal held that regular overtime that is not guaranteed, but that 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 he or she normally receives and must therefore be included in holiday pay. 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, although the courts have not addressed what a suitable reference period would be.
Case law has not yet determined whether or not overtime that is voluntary must be included in holiday pay. Again, it is likely that it will come down to whether or not an employee regularly works voluntary overtime, so that overtime pay is routinely expected as part of his or her normal pay. The Northern Ireland Court of Appeal, in Patterson v Castlereagh Borough Council  IRLR 721 NICA, held that there is no reason in principle why voluntary overtime should not be included when determining entitlement to holiday pay, if it is normally carried out and is an "appropriately permanent feature" of the worker's remuneration. However, this case is not binding in England, Wales or Scotland.
The right to be paid for non-guaranteed overtime in holiday pay derives from case law of the European Court of Justice, and so applies only to holiday pay for the four weeks' minimum annual leave under EU law, not to the additional 1.6 weeks provided for by the Working Time Regulations 1998 (SI 1998/1833). Employers should decide their policy on how to treat the additional 1.6 weeks' statutory minimum leave and any additional contractual entitlement, but may decide to include pay for overtime in all holiday pay to avoid complicating the administration of payments.