Overtime is a routine feature of workforce planning across many UK sectors, yet it continues to generate uncertainty when employers calculate statutory holiday pay. The central question is whether, and when, overtime must be included so that workers receive their “normal remuneration” during periods of annual leave. UK case law has made clear that where overtime is worked regularly enough to form part of typical earnings, it must be factored into holiday pay to ensure workers are not financially disadvantaged when taking leave.
This article provides a comprehensive explanation of holiday pay on overtime, outlining the legal framework, how different types of overtime are treated, and the effect of leading decisions on “normal remuneration”. It also explains how the 52-week reference period operates, what the 2024 holiday pay reforms mean for irregular-hours and part-year workers, and how employers should approach TOIL, payroll calculations and record-keeping. The aim is to give employers, HR teams and payroll professionals a complete, legally accurate guide to managing holiday pay on overtime and reducing the risk of disputes, underpayments and tribunal claims.
Section A: Understanding Holiday Pay on Overtime
Holiday pay on overtime is the principle that a worker’s statutory holiday pay must reflect their normal remuneration, not just their contracted basic pay. Where overtime is worked regularly enough to form part of a worker’s usual earnings, those overtime payments must be included in the holiday pay calculation. The purpose is to ensure workers are not financially disadvantaged for taking statutory annual leave, a right protected under the Working Time Regulations 1998.
Normal remuneration is interpreted broadly. Case law has established that the true question is not whether the overtime is voluntary or guaranteed, but whether, over time, it has become a routine and expected component of the worker’s pay. If overtime appears frequently in pay cycles and follows a settled pattern, it is likely to constitute normal pay and therefore must be reflected in statutory holiday pay.
Employers therefore need a clear understanding of how different types of overtime are structured within their workforce. Overtime provisions may be contractual or discretionary, occasional or continuous, employer-led or employee-requested. The legal obligation to include overtime in holiday pay is tied to patterns of work and earnings, not contractual labels. Even voluntary overtime may require inclusion where it is performed regularly over a sufficient period.
The Working Time Regulations 1998 grant workers 5.6 weeks of paid annual leave each year. For most workers, holiday pay on overtime must be included in at least four weeks of statutory leave. For irregular hours and part-year workers, recent reforms require inclusion across the full 5.6 weeks. Although employers may adopt a uniform method for all workers for simplicity, they must meet at minimum the statutory standard for each category.
The concept of normal remuneration extends beyond overtime to other variable earnings such as commission, certain bonuses and allowances where these payments are intrinsically linked to the work performed. Excluding such payments risks creating a financial disincentive to take leave, which the legislation and case law aim to prevent.
Understanding these foundations is essential for employers, HR professionals and payroll teams before moving into the technical steps of calculating holiday pay on overtime, including the use of reference periods, treatment of irregular hours and maintenance of accurate payroll records.
Section A summary: Holiday pay on overtime ensures that statutory annual leave reflects a worker’s true normal remuneration. Where overtime is worked with regularity or predictability, it must be captured in paid leave calculations. Employers must look at patterns of work, not contract wording, to identify qualifying overtime and maintain compliant holiday pay structures.
Section B: Legal Framework for Holiday Pay on Overtime
The treatment of overtime within holiday pay calculations is rooted in the Working Time Regulations 1998 (WTR) and a series of significant court rulings that have shaped the meaning of “normal remuneration”. Together, these authorities require employers to move beyond a basic-pay model and incorporate qualifying overtime where it forms part of typical earnings. Understanding this legal framework is essential for any organisation handling variable working patterns or overtime-dependent roles.
The WTR implement statutory rights derived from the European Working Time Directive, including limits on weekly working hours, rights to rest breaks, and the entitlement to 5.6 weeks of paid annual leave. Historically, many employers calculated holiday pay only on basic salary. However, subsequent case law established that such an approach may unlawfully underpay workers whose regular earnings extend beyond contractual hours. The principle is clear: holiday pay must mirror the worker’s normal pay so that workers are not financially discouraged from taking statutory leave.
Normal remuneration is not explicitly defined in legislation, but the courts have interpreted it to include payments that are “intrinsically linked” to the performance of contractual duties or paid with sufficient regularity that they form part of the worker’s usual pay profile. This includes various forms of overtime—compulsory, non-guaranteed and voluntary—where the pattern of work demonstrates consistency over time. Occasional or sporadic overtime may fall outside this definition, but employers must assess each case based on evidence rather than assumptions about voluntary or infrequent work.
Legal authorities have confirmed that excluding regularly paid overtime from holiday pay calculations creates an artificial drop in income during periods of leave and therefore undermines the protective purpose of the WTR. The obligation to pay normal remuneration applies to at least four weeks of statutory leave for most workers. For irregular hours and part-year workers, recent legal reforms now require normal remuneration to be applied across the full 5.6-week entitlement.
The courts have also considered other variable payments such as commission, productivity bonuses and certain allowances. Where such payments are sufficiently regular or linked to the performance of the job, they must be included in holiday pay in the same way as qualifying overtime. Employers therefore need to review all components of remuneration rather than focusing solely on overtime patterns.
The combined effect of the WTR and case law is that employers must adopt a holistic and data-driven approach to calculating holiday pay. This requires identifying all earnings that contribute to normal remuneration, analysing pay patterns over a representative period, and ensuring payroll systems are capable of capturing and processing variable elements in accordance with statutory rules.
Section B summary: The legal framework requires employers to include in holiday pay any earnings that reflect a worker’s normal remuneration, including regular overtime and other variable payments. This obligation stems from the Working Time Regulations 1998 and subsequent case law interpreting the purpose of statutory paid leave. Employers must therefore evaluate working patterns and pay data to determine which earnings form part of normal remuneration and must be included in holiday pay.
Section C: Types of Overtime and Their Treatment in Holiday Pay
Different forms of overtime can arise within a workforce, each carrying distinct implications for how holiday pay must be calculated. Although employment contracts often describe overtime using terms such as “voluntary”, “mandatory”, “guaranteed” or “non-guaranteed”, these labels do not determine whether overtime must be included in statutory holiday pay. The decisive question is whether the payments form part of the worker’s normal remuneration. Employers therefore need to understand how overtime is structured and performed across their organisation and evaluate each type in light of legal principles and case law.
1. Compulsory Overtime
Compulsory overtime refers to additional hours that employees are contractually required to work if instructed by the employer. Because this overtime is an integral part of the employment relationship and must be performed when requested, it is treated as a standard component of normal remuneration. Compulsory overtime must therefore be included in holiday pay calculations for statutory leave. Excluding it would artificially depress earnings during annual leave and contravene the requirement for holiday pay to reflect normal pay levels.
2. Guaranteed Overtime
Guaranteed overtime arises where the employer is contractually obliged to offer overtime and the employee is required to work it. This type of overtime offers the highest predictability since workers are entitled to the additional hours and corresponding pay regardless of operational needs. Because guaranteed overtime is built into the working arrangements, it clearly forms part of normal remuneration and must be reflected in holiday pay. Leaving it out of statutory holiday calculations would distort the worker’s normal pay position.
3. Non-Guaranteed Overtime
Non-guaranteed overtime refers to overtime that an employer is not required to offer, but that an employee must work if offered. In practice, this means the employer retains discretion over whether overtime is available, while the worker has an obligation to perform it when it arises. Case law has confirmed that non-guaranteed overtime must be included in holiday pay where it is worked regularly, as it contributes to normal remuneration. The fact that the employer need not offer the hours does not prevent such overtime from forming part of typical earnings if it features consistently over time.
4. Voluntary Overtime
Voluntary overtime occurs when the employee is under no obligation to work extra hours and the employer has no obligation to offer them. Even though voluntary overtime is genuinely discretionary for both sides, it may nevertheless form part of normal remuneration if it is worked regularly and predictably. Legal authority has confirmed that voluntary overtime cannot be excluded from holiday pay simply because it is optional. Instead, employers must examine frequency, consistency and duration. If voluntary overtime appears in pay periods with a stable pattern, contributes meaningfully to earnings, or is implicitly relied upon by the business, it must be included in statutory holiday pay.
Relevant factors include how often voluntary overtime is worked, whether the worker expects it to continue, whether the employer regularly relies on it to maintain staffing levels, and whether it appears in earnings in a settled pattern. Occasional or one-off voluntary overtime may not meet the threshold for normal remuneration, but employers should avoid making assumptions without reviewing actual data.
5. Commission and Bonuses
Normal remuneration is not limited to overtime. Commission, productivity bonuses, attendance bonuses, shift premia and similar variable payments may also need to be included in holiday pay where they are intrinsically linked to the performance of work or appear with sufficient regularity. For example, sales-related commission that forms part of usual earnings must be reflected in statutory holiday pay. Likewise, bonuses tied directly to output, performance or attendance may qualify where they arise frequently and predictably. Truly discretionary or occasional one-off bonuses, however, are generally excluded.
6. Allowances and Supplements
Workers may receive additional sums such as on-call payments, standby allowances, travel payments or shift allowances. Where these payments arise regularly or are closely connected to the performance of contractual duties, they should be included in holiday pay. Employers must examine whether such allowances are a routine part of pay, whether they are operationally necessary, and whether excluding them would produce a financial drop during holiday periods.
Across all categories of overtime and variable pay, the overarching requirement is consistency and representativeness. Employers must assess whether payments form part of the worker’s genuine earning pattern, rather than treating overtime labels as determinative. This assessment should be evidence-based and supported by payroll data covering an appropriate reference period.
Section C summary: The type of overtime is less important than whether it forms part of normal remuneration. Compulsory, guaranteed and non-guaranteed overtime must be included where worked regularly, and voluntary overtime must be included if it appears frequently enough to form part of usual earnings. Commission, bonuses and allowances may also fall within normal remuneration where they arise consistently and are linked to the performance of work. Employers should base decisions on pay patterns, not contract terminology.
Section D: Reference Periods and Calculating Holiday Pay on Overtime
Calculating holiday pay on overtime requires employers to look beyond the current pay period and instead assess a representative span of earnings. This ensures that holiday pay reflects the worker’s normal remuneration rather than a snapshot distorted by short-term fluctuations. UK law sets out how employers must determine average weekly pay for workers whose pay varies with the amount of work done, including where overtime is a regular feature of their earnings. Understanding reference periods, their historical development and their application is essential for producing accurate and compliant holiday pay calculations.
Until April 2020, employers relied on a 12-week reference period, looking back over the 12 paid weeks immediately preceding the holiday to determine average weekly earnings. However, this short reference period was widely recognised as producing unrepresentative results for workers with seasonal or irregular patterns of overtime. A worker with unusually high or low overtime in the weeks before taking holiday could receive holiday pay significantly above or below their genuine average earnings, undermining the principle of normal remuneration.
To address these concerns, the reference period was extended to 52 weeks. Since 6 April 2020, employers must use the 52 paid weeks immediately preceding the holiday to calculate average weekly pay for workers whose remuneration varies with hours or earnings. This longer period smooths out peaks and troughs in overtime, resulting in a more accurate reflection of typical earnings and reducing the risk of underpayment.
1. Applying the 52-Week Reference Period
When applying the 52-week reference period, employers must look back over the most recent 52 weeks in which the worker received pay. Any week in which the worker received no pay must be skipped, and the employer must continue moving backwards until 52 weeks of paid data have been gathered. This ensures that the average includes only weeks where actual earnings arose and is not diluted by unpaid absence, such as periods of sickness or unpaid leave.
If the worker has been employed for less than 52 weeks, the reference period consists of the total number of paid weeks available. These weeks must still be representative – employers should ensure that the data used reflects typical patterns rather than unusual fluctuations where possible.
2. Treatment of Irregular Hours and Part-Year Workers
Recent reforms mean that irregular hours and part-year workers may have their statutory holiday entitlement and holiday pay calculated differently from regular-hours staff. For leave years beginning on or after 1 April 2024, statutory entitlement for these workers may be calculated using an accrual method of 12.07% of hours worked, up to the statutory maximum of 5.6 weeks. For these groups, holiday pay may also be rolled up, whereby an additional sum representing holiday pay is added to each payslip.
Where rolled-up holiday pay is used for irregular hours or part-year workers, employers must ensure that overtime earnings are included in the rolled-up calculation whenever such earnings form part of normal remuneration. The presence of rolled-up holiday pay does not remove the obligation to base calculations on normal earnings, and employers must still maintain accurate working-time and pay records to demonstrate compliance.
3. Identifying Qualifying Earnings
The next stage in calculating holiday pay on overtime is identifying which elements of pay must be included as normal remuneration. In addition to basic salary, employers must review overtime earnings, commission, bonuses and allowances to determine whether they arise frequently enough and with sufficient predictability to warrant inclusion. Payments that are intrinsically linked to the performance of contractual duties or appear regularly in the worker’s earnings history must form part of the holiday pay calculation.
Employers should carry out a systematic review of pay data across the reference period. This requires summing all qualifying earnings for each paid week, excluding one-off or sporadic payments that do not amount to normal remuneration. The resulting total is then divided by the number of paid weeks used in the reference period to produce an average weekly earnings figure. This figure forms the basis for calculating holiday pay when a worker takes annual leave.
4. Calculating the Holiday Pay Amount
Once average weekly earnings are determined, employers must multiply that figure by the amount of leave the worker is taking. Some employers calculate holiday pay on a daily or hourly basis. In such cases, the weekly average should be converted accordingly by dividing by the number of working days in the week or the number of hours typically worked in a day. Whatever method is chosen, it must reliably reflect the worker’s true normal remuneration and be applied consistently across comparable groups of workers.
For transparency and compliance purposes, employers should ensure that payroll systems are configured to capture all qualifying elements of normal remuneration within the reference period. Regular reviews, audits and adjustments to payroll processes will help ensure that holiday pay continues to reflect actual working patterns as they evolve over time.
Section D summary: Holiday pay on overtime must be calculated using a representative average of earnings that reflect normal remuneration. The 52-week reference period is now standard for workers with variable pay, although irregular hours and part-year workers may follow an accrual-based approach for leave years beginning on or after 1 April 2024. Employers must identify qualifying earnings, calculate accurate averages and ensure payroll systems support compliance with these legal requirements.
Section E: Time Off in Lieu (TOIL) and Its Interaction with Holiday Pay
Time Off in Lieu (TOIL) is an arrangement under which employees who work additional hours receive paid time off instead of overtime pay. TOIL is increasingly used to support flexible working and reduce payroll costs, particularly in sectors where workloads fluctuate throughout the year. Although TOIL can be an effective tool when managed correctly, it sits alongside statutory holiday rights rather than replacing them. Employers therefore need a clear understanding of how TOIL interacts with holiday pay on overtime to avoid unlawful deductions, inconsistent treatment and disputes about entitlements.
TOIL is not defined in legislation and exists only through agreement—either individually or through a workplace policy. Employers cannot impose TOIL unilaterally unless the employment contract expressly permits it. The agreement must specify how TOIL is earned, how it is recorded, when it can be taken and whether it is awarded at basic or enhanced rates. For example, if overtime is normally paid at time and a half, employers must clarify whether TOIL will be accrued hour-for-hour or at the enhanced rate. Lack of clarity in TOIL policies is one of the most common causes of disputes.
1. TOIL vs Overtime Pay
When an employee works additional hours, an employer may either pay for the overtime or offer TOIL. Where TOIL is used, the time off granted must accurately reflect the hours worked. If a worker completes three hours of additional work, they should normally receive three hours of TOIL, unless the contractual or policy framework specifies accrual at an enhanced rate. Employers must ensure that TOIL arrangements do not result in an unlawful deduction from wages by depriving employees of pay they are contractually entitled to receive.
Because TOIL is an alternative to paid overtime, employers must ensure consistency in how they treat employees who regularly accrue additional hours. TOIL should not be used as a means of avoiding the inclusion of overtime earnings within holiday pay calculations. If a worker typically receives overtime pay but occasionally opts for TOIL, the overtime element must still be recognised in their normal remuneration for holiday pay purposes. TOIL cannot be used to circumvent statutory obligations.
2. TOIL and Statutory Holiday Entitlement
A worker’s statutory holiday entitlement under the Working Time Regulations 1998 remains entirely separate from TOIL. TOIL cannot be substituted for statutory paid leave and cannot reduce the minimum 5.6-week annual entitlement. Workers who accrue TOIL must still be permitted to take their full statutory holiday, and TOIL must be provided in addition to that entitlement. TOIL should therefore be managed as a distinct category of time off within HR systems and staff records.
When workers take holiday, the pay they receive must be based on their normal remuneration, which may include regular overtime. Even where TOIL is used extensively, employers must ensure that holiday pay properly reflects overtime patterns. If a worker routinely earns overtime pay but sometimes receives TOIL, their holiday pay must still reflect the actual overtime earnings they would ordinarily receive. Employers cannot treat TOIL accrual as evidence that overtime pay is not part of normal remuneration.
3. Calculating Holiday Pay Where TOIL Is Used
In organisations where TOIL is common, the key question is whether overtime payments form part of normal remuneration for holiday pay purposes. This assessment must be based on actual earnings and patterns of work, not on how often TOIL is taken instead of pay. If the worker generally receives overtime pay and that payment appears regularly over time, the fact that TOIL is occasionally taken does not diminish the requirement to include overtime in statutory holiday pay calculations.
Employers should ensure that TOIL accrual records are kept separate from earnings data. Holiday pay should be based solely on qualifying pay elements identified through the reference period. Where TOIL is taken, it should be clearly recorded as paid time off linked to additional hours worked, but not as an element that alters the calculation of reference-period earnings. Employers should maintain a transparent audit trail showing how both TOIL and holiday pay were calculated.
4. Best Practice for Managing TOIL
Good TOIL management requires clear rules, accurate record-keeping and fair application across the workforce. Employers should draft or update TOIL policies to specify when TOIL can be used, how it is accrued, the rate at which it is earned, how it is authorised and when it must be taken. Policies should also state that TOIL sits outside statutory holiday entitlement, ensuring that employees understand their rights.
Accurate time-recording systems are critical in environments where TOIL is used. Employers should track overtime hours worked, TOIL accrued and TOIL taken. Regular internal audits help ensure that TOIL balances are accurate, that no employee is working excessive hours without rest and that statutory rights are protected. Employees should be encouraged to take TOIL promptly to prevent excessive accruals or administrative burdens.
Section E summary: TOIL offers flexibility in managing additional hours but operates alongside, not in place of, statutory holiday rights. Employers must ensure that workers retain their full 5.6-week entitlement and that holiday pay accurately reflects normal remuneration, including regular overtime. Robust TOIL policies, clear communication and consistent record-keeping are essential for compliance and to avoid disputes.
Section F: Potential Penalties and Risks of Non-Compliance
Failure to calculate holiday pay correctly, including the requirement to incorporate regular overtime into statutory leave, exposes employers to a range of financial, legal and operational risks. Holiday pay on overtime is a well-established area of UK employment law, and tribunals continue to see significant volumes of claims where workers assert that their statutory holiday pay did not reflect normal remuneration. Employers must therefore be aware of the consequences of non-compliance and the potential liabilities that can arise from underpayments.
The most common route for workers to challenge incorrect holiday pay is an unlawful deduction from wages claim. Employees have three months minus one day from the date of the alleged underpayment to bring a claim, although linked series of deductions may extend the time limit. Courts have held that if holiday pay has been calculated incorrectly over multiple pay periods, and the pattern constitutes an ongoing series, workers may seek redress for each individual underpayment within that chain.
Historically, the Deduction from Wages (Limitation) Regulations 2014 limited backpay for unlawful deduction claims to two years in Great Britain. Recent tribunal developments have called the robustness of this two-year backstop into question, creating uncertainty regarding how far back future claims may reach. Until definitive appellate guidance is issued, employers should adopt a cautious approach and recognise that potential liabilities could extend beyond the two-year period in some circumstances.
In addition to financial compensation for underpaid holiday, employers may face reputational risks. Cases involving systemic miscalculations of holiday pay can damage trust among the workforce and attract negative attention from unions, regulators or the public. Employees are increasingly aware of their rights, and missteps in pay administration can undermine confidence in broader HR and payroll practices. Good governance therefore requires proactive monitoring, auditing and correction of pay processes.
From an operational perspective, non-compliance may result in the need for large-scale recalculations of historic holiday pay, administrative burdens and the diversion of HR and payroll resources to investigate discrepancies. Organisations with large numbers of variable-hours workers or overtime-heavy roles are particularly exposed, as miscalculations may affect substantial portions of the workforce. Employers may also incur legal costs defending claims, even where settlement is ultimately reached.
Regulatory scrutiny may arise where holiday pay errors intersect with National Minimum Wage compliance. While holiday pay itself is not directly enforced by HMRC, misclassification of hours or failure to pay for working time could trigger NMW implications. Employers should therefore ensure that all calculations relating to working hours, overtime, TOIL and holiday pay are aligned, consistent and supported by robust record-keeping.
Section F summary: Incorrect holiday pay calculations expose employers to claims for unlawful deductions, potential backpay liabilities, administrative burdens and reputational harm. With growing uncertainty around backpay limits and increasing worker awareness of statutory rights, employers must prioritise accurate, transparent and auditable holiday pay processes that fully capture normal remuneration, including regular overtime.
Section G: Common Mistakes Employers Make
Holiday pay on overtime continues to be one of the most frequently misunderstood areas of UK employment law. Despite clear judicial guidance, many employers still apply outdated or incomplete methods when calculating statutory holiday pay. These mistakes can lead to significant financial exposure, inconsistent treatment of staff, and loss of trust within the workforce. Understanding the most common errors is the first step toward building a compliant, defensible and transparent holiday pay framework.
1. Excluding Voluntary Overtime from Calculations
One of the most widespread errors is the assumption that voluntary overtime can be excluded from holiday pay because employees are not contractually obliged to work it. This is incorrect. Case law has made clear that where voluntary overtime is worked regularly and forms part of what a worker normally earns, it must be included when calculating statutory holiday pay. Employers should avoid relying on contractual descriptions alone and instead analyse overtime patterns to determine whether the earnings meet the threshold for normal remuneration.
Excluding regular voluntary overtime from holiday pay calculations creates a drop in income during leave, undermining the protective purpose of statutory paid holiday. It also exposes employers to unlawful deduction claims and potential backpay liabilities. A data-driven assessment of overtime patterns is essential to avoid this mistake.
2. Poor or Inaccurate Record-Keeping
Accurate time and pay records are fundamental to compliant holiday pay calculations. Employers who fail to maintain robust systems for recording hours worked, overtime performed and TOIL accrued risk miscalculating holiday pay. Inadequate record-keeping weakens an employer’s ability to defend claims and increases the likelihood of inconsistencies between actual earnings and holiday pay.
The Working Time Regulations require employers to maintain records sufficient to demonstrate compliance with working time limits. Payroll audits, reliable timekeeping systems and consistent oversight of variable pay elements are all essential to maintaining an accurate dataset from which normal remuneration can be calculated.
3. Relying on Outdated Legal Assumptions
Holiday pay law has evolved significantly over the past decade. Employers who continue to rely on outdated assumptions—such as calculating holiday pay solely on basic salary or ignoring the inclusion of commission, bonuses or allowances—are likely to be in breach of legal requirements. The extension of the reference period to 52 weeks and the recent reforms affecting irregular hours and part-year workers further require employers to update policies and payroll processes to remain compliant.
Failure to stay informed about legal developments can lead to systemic errors that affect large groups of workers. Regular review of case law, updated HR policies and ongoing training for HR and payroll teams are critical to ensuring that organisations apply the correct legal standards.
4. Confusing TOIL with Holiday Entitlement
Another common mistake is treating TOIL as interchangeable with statutory paid leave. TOIL cannot replace holiday entitlement and cannot be used to reduce the minimum 5.6-week holiday requirement. Employers must ensure that TOIL and holiday leave are managed as separate entitlements, recorded independently and reflected correctly in HR systems.
If workers regularly earn overtime pay, the fact that they sometimes take TOIL instead does not prevent overtime from forming part of their normal remuneration. Holiday pay must still reflect actual earning patterns, irrespective of how frequently TOIL is used to offset overtime.
5. Lack of Transparency and Communication
Many disputes arise not from the calculations themselves but from the way holiday pay decisions are communicated. Workers who do not understand why certain overtime payments are or are not included may perceive unfairness, even where the employer’s approach is legally sound. Clear communication, policy visibility and the use of worked examples can reduce confusion and demonstrate fairness in pay practices.
Employers should ensure that their holiday pay policies are accessible, easy to understand and applied consistently across teams. Transparent communication helps manage expectations and reduces the likelihood of grievances or tribunal claims.
Section G summary: Employers often make avoidable mistakes when calculating holiday pay on overtime, including excluding regular voluntary overtime, keeping inadequate records, relying on outdated assumptions, confusing TOIL with statutory leave and failing to communicate clearly with staff. Avoiding these errors requires strong record-keeping, up-to-date legal knowledge, transparent policies and a commitment to continuously reviewing pay practices.
Section H: Best Practices for Employers
Managing holiday pay on overtime requires a proactive, structured and transparent approach. Employers must ensure that policies, payroll systems and working practices align with legal requirements while also promoting fairness and clarity for workers. Implementing best practice reduces the risk of disputes, enhances compliance and strengthens trust in organisational pay processes. The following measures represent key components of an effective and defensible holiday pay framework.
1. Conduct Regular Payroll Audits
Payroll audits are essential for identifying whether holiday pay calculations accurately capture all elements of normal remuneration, including qualifying overtime. Audits should review patterns of pay across the 52-week reference period, ensuring that regular overtime, commission, allowances and bonuses have been correctly included. Any discrepancies should be corrected promptly to prevent systemic underpayments and potential legal claims.
Employers should build audit cycles into their annual HR and finance processes. Periodic checks allow organisations to identify changes in working patterns, update payroll rules and ensure that all staff groups are being treated consistently and lawfully.
2. Provide Ongoing Training to HR and Payroll Teams
Holiday pay law is complex and continues to evolve. HR and payroll teams must have up-to-date knowledge of legal obligations, including the interpretation of normal remuneration, the 52-week reference period and the treatment of different overtime types. Training should also cover the recent reforms affecting irregular hours and part-year workers, ensuring that staff understand the distinction between reference-period averaging and 12.07% accrual methods.
Training should be provided regularly and updated following significant case law or legislative changes. Equipping staff with the correct knowledge reduces errors, enhances compliance and ensures consistent application of policy.
3. Stay Informed on Legal Developments
Holiday pay is an area where case law continues to refine the scope of normal remuneration and the correct approach to calculation. Employers who do not stay informed risk applying outdated practices that no longer meet legal standards. Monitoring legal updates, attending employment law briefings and maintaining relationships with legal advisers help ensure that policies remain compliant.
Given recent uncertainty regarding the two-year backpay cap and continuing reform in working time regulations, staying up to date is essential for managing risk effectively.
4. Seek Specialist Legal Advice When Needed
Where working patterns are complex or overtime is an integral part of operational delivery, employers may require specialist legal guidance. Legal advisers can help interpret pay patterns, audit historic calculations, assess risk exposure and draft compliant policies. Early advice can reduce the likelihood of large-scale recalculations or costly tribunal claims.
Seeking advice is particularly important when organisations undergo structural changes, introduce new shift patterns or redesign overtime arrangements, as each of these developments may alter how normal remuneration is assessed.
5. Update Payroll Systems and Processes
Many payroll systems are not configured by default to include all elements of normal remuneration within holiday pay. Employers must ensure that their systems capture regular overtime payments and other variable earnings that contribute to typical pay levels. This includes building reference-period logic into payroll processes and ensuring that mechanisms exist to exclude unpaid weeks while still capturing 52 paid weeks of earnings.
Payroll updates should also account for irregular hours and part-year workers who may follow alternative statutory rules, such as accrual based on 12.07% of hours worked. Systems must reflect the correct method for each worker group and apply holiday pay calculations accurately and consistently.
6. Maintain Accurate and Comprehensive Records
Accurate record-keeping underpins compliant holiday pay calculations. Employers must maintain detailed logs of hours worked, overtime performed, allowances paid, TOIL accrued and TOIL taken. These records support the identification of normal remuneration, assist in audits and provide essential evidence in the event of a dispute.
Record-keeping systems should allow employers to extract data easily for analysis across reference periods. This helps ensure that holiday pay continues to reflect actual earnings as workers’ roles evolve over time.
7. Communicate Clearly With Employees
Transparency is central to preventing misunderstandings around holiday pay. Employers should provide clear information about how holiday pay is calculated, which elements of pay are included and how overtime patterns influence entitlement. Policy documents should be easily accessible and written in straightforward language.
By explaining the rationale behind holiday pay calculations and providing illustrative examples, employers can reduce grievances and demonstrate a commitment to fairness.
8. Review and Update Policies Annually
Annual reviews allow employers to ensure that their holiday pay policies remain compliant with the latest legal developments and accurately reflect working patterns. These reviews should compare policy wording with operational practice to identify inconsistencies. Employers should also evaluate whether emerging patterns of overtime or variable pay require policy updates or payroll system adjustments.
An annual review process contributes to organisational stability by ensuring that policies remain accurate, effective and capable of withstanding legal scrutiny if challenged.
9. Maintain a Clear Audit Trail
Employers should document the reasoning behind holiday pay decisions, including how normal remuneration was assessed and how qualifying earnings were identified. Maintaining a clear audit trail ensures accountability, supports compliance efforts and provides essential evidence in the event of internal or external scrutiny.
Documentation should include details of policy updates, payroll changes, legal advice received and any worker communications relating to holiday pay. A transparent record strengthens the employer’s position in the event of a tribunal claim or regulatory investigation.
Section H summary: Best practice requires employers to combine accurate record-keeping, strong payroll processes, regular training, legal awareness and clear communication. By adopting a proactive and structured approach, organisations can ensure that holiday pay on overtime reflects normal remuneration, complies with legal standards and builds trust within the workforce.
Section I: Summary
Holiday pay on overtime requires employers to ensure that statutory annual leave is paid at a rate that reflects a worker’s normal remuneration rather than basic salary alone. Where overtime is worked regularly enough to contribute meaningfully to a worker’s typical earnings, those payments must be included in holiday pay. This applies irrespective of whether the overtime is voluntary, non-guaranteed or contractually required, provided that it forms part of an established earning pattern.
Accurate calculation requires employers to identify qualifying earnings, analyse pay data across the 52-week reference period and ensure that payroll systems reflect the correct approach for each category of worker. For irregular hours and part-year workers, recent statutory reforms introduce alternative calculation methods that may require accrual-based systems or rolled-up holiday pay, but the principle of reflecting normal remuneration remains central. Employers must therefore maintain robust records, clear policies and transparent communication to support compliant implementation.
Failure to include qualifying overtime in holiday pay exposes employers to significant legal and financial risks, including tribunal claims, backpay liabilities and reputational damage. A structured approach—combining regular audits, updated policies, reliable payroll systems and ongoing training—helps organisations avoid errors, protect workers’ statutory rights and maintain trust. By applying these principles consistently, employers can ensure that holiday pay reflects genuine earning patterns and withstands legal scrutiny.
Section J: FAQs
Do employers need to include voluntary overtime in holiday pay calculations?
Yes. Voluntary overtime must be included in holiday pay when it is worked regularly enough to form part of normal remuneration. The fact that the overtime is optional does not prevent it from being included if it appears consistently in pay patterns.
How does the 52-week reference period work for calculating holiday pay?
Holiday pay must be based on the previous 52 paid weeks of earnings, excluding weeks in which the worker received no pay. If the worker has fewer than 52 paid weeks, all paid weeks available are used. This ensures that holiday pay reflects genuine average earnings.
What happens if an employer does not include overtime in holiday pay?
The worker may bring an unlawful deduction from wages claim. Employers could face backpay liabilities, administrative burdens and reputational risks. In some cases, multiple underpayments may be treated as a series, extending the scope of a claim.
Is time off in lieu (TOIL) included in holiday pay calculations?
TOIL does not replace statutory paid leave and does not reduce holiday entitlement. Holiday pay must still reflect normal remuneration, including regular overtime, even when TOIL is granted instead of paid overtime for some additional hours.
What are the risks of failing to keep accurate payroll records?
Inaccurate records can lead to miscalculations, underpayments and an inability to demonstrate compliance if a dispute arises. Poor record-keeping may also intersect with National Minimum Wage risks, increasing exposure to regulatory scrutiny.
How often should employers review their holiday pay policies?
Holiday pay policies should be reviewed at least annually and updated following significant legal developments, changes in overtime patterns or adjustments to payroll systems. Regular reviews reduce compliance risks and ensure accuracy.
Can employers offer TOIL instead of paying overtime?
Yes, provided TOIL is agreed and clearly defined in contracts or policies. TOIL must not reduce statutory holiday entitlement, and offering TOIL does not remove the obligation to include qualifying overtime in holiday pay calculations.
How can employers ensure compliance with holiday pay rules?
Compliance requires accurate payroll systems, reliable records, regular audits, staff training and up-to-date legal knowledge. Employers should also maintain transparent communication with workers and seek specialist advice where needed.
Section K: Glossary
| Term | Definition |
|---|---|
| Holiday Entitlement | The statutory right under the Working Time Regulations 1998 for workers to receive 5.6 weeks of paid annual leave each year, pro-rated for part-time staff. |
| Overtime | Hours worked beyond contracted hours. Overtime may be compulsory, non-guaranteed, voluntary or guaranteed, each with differing implications for holiday pay. |
| Voluntary Overtime | Overtime that workers may choose to undertake but are not contractually obliged to perform. It must be included in holiday pay where worked regularly. |
| Guaranteed Overtime | Overtime that the employer is contractually required to offer and the worker is obliged to work. It always forms part of normal remuneration. |
| Non-Guaranteed Overtime | Overtime the employer is not required to offer but which the worker must perform if offered. It must be included in holiday pay where regularly worked. |
| Time Off in Lieu (TOIL) | Paid time off granted instead of overtime pay. TOIL does not replace statutory holiday and must be kept separate from annual leave entitlement. |
| Reference Period | The period used to calculate average weekly earnings for holiday pay. For most workers with variable pay, this is the previous 52 paid weeks. |
| Normal Remuneration | Earnings a worker regularly receives, including overtime, commission, bonuses or allowances, where these form part of typical pay patterns. |
| Statutory Leave | The legally mandated minimum annual leave entitlement under the WTR, normally 5.6 weeks for full-time workers. |
| Working Time Regulations 1998 | UK legislation governing working hours, rest breaks and annual leave, forming the basis for statutory holiday rights and holiday pay rules. |
| Back-Pay | Payments owed to workers for previous underpayments, including underpaid holiday pay or miscalculated overtime. |
| Payroll Audit | A review of payroll processes and data to ensure that holiday pay, overtime and other statutory entitlements are being calculated correctly. |
| ACAS | The Advisory, Conciliation and Arbitration Service, which provides guidance on employment rights, including holiday pay. |
| Maternity Leave | Statutory leave taken before and after childbirth. Holiday entitlement continues to accrue during maternity leave. |
Section L: Useful Links
| Resource | Link |
|---|---|
| Holiday Pay on Overtime – Expert Guidance | https://www.davidsonmorris.com/holiday-pay-on-overtime/ |
| Government Guidance: Holiday Entitlement and Rights | https://www.gov.uk/holiday-entitlement-rights |
| Government Tool: Calculate Holiday Entitlement | https://www.gov.uk/calculate-your-holiday-entitlement |
| ACAS Holiday Pay Guidance | https://www.acas.org.uk/holiday-pay |
| CIPD Factsheet: Holiday Entitlement | https://www.cipd.co.uk/knowledge/fundamentals/emp-law/holiday-entitlement-factsheet |
| XpertHR Holiday Pay FAQs | https://www.xperthr.co.uk/faq/holiday-entitlement-faqs/ |
| TUC: Workers’ Holiday Rights | https://www.tuc.org.uk/your-rights-holiday-rights |
| Legislation: Working Time Regulations 1998 | https://www.legislation.gov.uk/uksi/1998/1833/contents/made |
| Maternity Action: Holiday Entitlement and Maternity Leave | https://maternityaction.org.uk/advice/maternity-leave-holiday-entitlement/ |
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing & Content Agency for the Professional Services Sector.
