Overtime creates the highest holiday pay risk because it sits at the intersection of variable earnings, payroll averaging, statutory leave rules and tribunal exposure. Employers rarely get challenged on basic pay. They get challenged when overtime becomes routine, workers take leave and their pay drops.
What this article is about:
This guide explains when UK employers must include overtime in holiday pay, how to decide whether overtime is “normal remuneration”, how the statutory 4 weeks differs from the additional 1.6 weeks and how the post-1 April 2024 reforms affect irregular hours and part-year workers. It is written for HR professionals and business owners who need a defensible, auditable approach that reduces cost exposure and prevents disputes.
Section A: When does overtime legally have to be included in holiday pay?
1. What does “holiday pay on overtime” mean in UK law?
In UK employment law terms, “holiday pay on overtime” is shorthand for a holiday pay calculation that includes overtime payments where those payments are part of the worker’s “normal remuneration”.
This matters because statutory paid annual leave is not just a time-off right. It is a compliance obligation under the Working Time Regulations 1998. Case law developed around the principle that workers should not be financially worse off for taking statutory annual leave, because that creates a deterrent effect. Once overtime becomes part of what the worker normally earns, excluding it can create exactly that deterrent.
What the law requires
For statutory leave, employers must pay holiday pay in a way that meets the legal standard for the worker’s entitlement. Where pay varies, the law expects employers to use the correct averaging approach and include pay elements that form part of normal remuneration for the relevant leave entitlement.
What the employer must decide or do
Decide whether overtime in your organisation is genuinely exceptional or has become part of “normal pay” for certain roles, teams or sites. Decide whether you will run a split approach (different calculations for different parts of statutory leave) or harmonise the method across your full holiday entitlement for simplicity and risk reduction. Ensure payroll can evidence the calculation method. A correct legal policy that cannot be executed consistently by payroll is where disputes start.
What happens if you get it wrong
Holiday pay underpayments usually surface through grievances, leavers challenging final pay, or informal comparisons between teams. Once one worker identifies a shortfall, claims can quickly spread across a cohort, particularly where overtime is common and patterns are easy to evidence. The direct cost is arrears and settlement pressure. The operational cost is payroll remediation, management time and employee relations fallout.
2. Does the law treat compulsory, non-guaranteed and voluntary overtime differently?
Yes, but not in the simplistic way many employers assume.
The legal question is not “is overtime voluntary?” The legal question is whether the overtime pay is paid with sufficient regularity and consistency that it has become part of what the worker normally receives. The type of overtime affects how easily it meets that test, but it is not the whole analysis.
Compulsory overtime
Where the contract requires the worker to work overtime when asked, the payment is more likely to be treated as part of normal remuneration once it is worked with some regularity. Employers are on weaker ground arguing that compulsory overtime is “exceptional” if the business model depends on it.
Non-guaranteed overtime
This is overtime the employer does not have to offer, but the worker must work if offered. From a compliance perspective, this category often creates the highest hidden risk because it can be routine in practice while still being described as “optional” operationally. If the pattern is settled, the holiday pay risk is similar to compulsory overtime.
Voluntary overtime
Voluntary overtime is where neither party is contractually obliged: the employer offers it and the worker can refuse it. Many payroll approaches still exclude voluntary overtime by default. That is where employers get caught. Voluntary overtime can still count where it is worked so regularly that it is effectively part of normal remuneration. In other words, “voluntary” in contract language does not prevent it becoming “normal” in earnings reality.
What the law requires
The legal requirement is to include overtime payments in holiday pay where they form part of normal remuneration for the relevant statutory leave entitlement. Whether an overtime category is labelled voluntary, compulsory or non-guaranteed is relevant, but it is not determinative.
What the employer must decide or do
Classify overtime using two lenses: contract wording and actual working practice. If those don’t match, practice tends to win the dispute. Define internal criteria for “regular and settled” overtime, then apply it consistently. Inconsistent inclusion decisions between workers doing the same job is a predictable dispute trigger. Document decision-making. When challenged, “we didn’t think it counted” is not a defensible position. “Our policy uses X criteria applied across Y cohorts with Z payroll method” is defensible.
What happens if you get it wrong
If you exclude overtime that is in reality part of normal remuneration, underpayments can repeat across multiple leave events. That creates the classic “series” risk and turns a small weekly shortfall into a meaningful liability over time, typically pursued as an unlawful deduction from wages claim.
3. Is overtime holiday pay required for all statutory leave or only part of it?
This is where employers need a clear, explicit position.
Statutory holiday entitlement under the Working Time Regulations is 5.6 weeks. Many employers run two concepts within this: 4 weeks of leave aligned to the historic EU-derived entitlement and the additional 1.6 weeks of UK “top-up” leave.
The practical reason employers care is that the more complex “normal remuneration” approach is widely associated with the core 4 weeks, while the additional 1.6 weeks has historically been treated differently by some organisations. Many employers choose to apply the same “normal remuneration” approach across the full 5.6 weeks anyway, because the operational simplicity can outweigh any perceived savings. There is no statutory prohibition on applying “normal remuneration” across the full 5.6 weeks.
You should treat this as a risk and governance decision, not merely a payroll calculation choice. Your approach has to be explainable, consistent and workable in payroll at scale.
What the law requires
Employers must pay statutory holiday pay correctly for the leave taken. Where overtime is part of normal remuneration, the employer must ensure holiday pay meets the legal standard for the relevant entitlement and does not create a deterrent to taking leave.
What the employer must decide or do
You have two defensible strategic options.
1) Harmonised approach (lower dispute risk, simpler operations)
Pay holiday pay based on normal remuneration across the full 5.6 weeks (and often across contractual leave as well). This reduces arguments about which “bucket” of leave is being taken and prevents managers or payroll from misallocating days.
2) Split approach (possible cost control, higher operational risk)
Apply a normal remuneration method to the relevant statutory portion, with a different approach for the additional leave. If you do this, you must also define the order in which leave is deemed taken, how payroll distinguishes leave types and what happens where workers take leave intermittently across the year.
If you cannot implement those mechanics cleanly, the split approach becomes hard to defend in practice and disputes often focus on inconsistency and lack of transparency.
What happens if you get it wrong
The risk is less about losing one legal argument and more about losing the organisational narrative: workers and reps argue the approach is opaque and unfair, payroll applies different rules inconsistently and managers cannot explain pay outcomes. Grievances rise and settlement pressure increases.
4. Do the post-1 April 2024 reforms change the employer analysis for overtime holiday pay?
They change the analysis most sharply for irregular hours workers and part-year workers, and they change the implementation mechanics employers can use.
From 1 April 2024 (for relevant leave years), reforms allow statutory holiday entitlement for irregular hours and part-year workers to accrue in a way commonly expressed as the 12.07% accrual method, and they allow the option of rolled-up holiday pay for those cohorts only, if applied correctly and transparently.
For employers, this does not remove the need to think about overtime and normal remuneration. It changes how entitlement and pay can be administered for defined cohorts, and it can reduce disputes where holiday pay is rolled up correctly. It also introduces a new compliance risk: applying these methods to the wrong workers, or failing to document the worker category and leave year basis. Applying these methods to standard fixed-hours or full-time staff will usually be unlawful.
What the law requires
If you use accrual or rolled-up holiday pay approaches, you must ensure the worker qualifies as irregular hours or part-year within the legal framework, the method is applied for the correct leave year and cohort and pay and entitlement records remain audit-ready.
What the employer must decide or do
Identify who in your workforce is genuinely irregular hours or part-year for these rules. Decide whether rolled-up holiday pay is appropriate for your operating model or whether it creates additional employee relations risk. Ensure payslips, contracts and policies align. Rolled-up holiday pay that is not clearly separated and explained is an avoidable dispute.
What happens if you get it wrong
Misclassification is the biggest risk. If you incorrectly place workers into the irregular hours or part-year bucket, you can generate immediate underpayment allegations and a wider credibility problem across payroll and HR governance.
Section A summary
Holiday pay on overtime is not a niche payroll issue. It is a compliance, cost and dispute-risk issue driven by whether overtime has become part of “normal remuneration”, how you treat the statutory leave structure and whether your approach is consistent and executable in payroll. Your first employer task is to take a clear position on which overtime patterns count, how you will calculate holiday pay for the relevant leave and how you will evidence the method if challenged.
Section B: How do employers decide whether overtime counts as “normal remuneration”?
This is the decision point where most employers either reduce risk decisively or unknowingly create long-term exposure. The law does not give a numerical test. It gives a principle. Employers must turn that principle into a defensible internal rule.
1. What does “normal remuneration” actually mean in practice?
“Normal remuneration” is not defined exhaustively in statute. It has been shaped by case law around a single policy objective: workers should not be financially discouraged from taking statutory leave.
In practical terms, this means holiday pay must reflect what the worker normally receives when they are working, not what they receive on paper in a quiet or idealised week.
Normal remuneration can therefore include basic contractual pay, overtime payments, shift premia and allowances, and commission pay or productivity-related payments.
The common feature is not how the payment is labelled, but whether it is regular, settled and intrinsically linked to the performance of duties.
What the law requires
Employers must assess whether overtime payments are paid with sufficient regularity that excluding them would cause a noticeable drop in pay when statutory leave is taken.
What the employer must decide or do
Move away from labels such as “voluntary” or “optional” and focus on pay reality. Decide whether overtime earnings form a predictable part of take-home pay for particular roles or individuals. Accept that “normal” can differ between job families, sites or teams.
What happens if you get it wrong
If your decision-making relies on contractual labels alone, tribunals tend to favour evidence of actual pay patterns. Payslips, rotas and historical averages will outweigh policy wording.
2. How regular does overtime need to be before it must be included?
There is no bright-line test. That uncertainty is intentional. The courts have consistently resisted setting numerical thresholds because working patterns vary across industries.
That said, employers still need internal thresholds.
In practice, overtime is more likely to count as normal remuneration where it is worked most weeks or frequently across the year, there is an expectation, even if informal, that overtime will be available, it forms part of workforce planning rather than emergency cover, and workers would reasonably expect their holiday pay to reflect it.
Overtime is less likely to count where it is genuinely ad hoc, it arises only in exceptional circumstances, it cannot be predicted or relied upon, or it is clearly disconnected from the normal pattern of work.
What the law requires
A fact-sensitive assessment. Employers must look at reality, not theory.
What the employer must decide or do
Define internal criteria such as frequency over a reference period, predictability, and whether overtime is rostered or planned, then apply the criteria consistently. Keep evidence of how and why decisions were made.
What happens if you get it wrong
The biggest risk is inconsistency. If two workers doing the same role are treated differently without a clear rationale, disputes tend to escalate quickly and are hard to defend.
3. Does seasonal or peak-period overtime count?
Seasonal overtime is a common blind spot.
Overtime worked heavily during predictable peak periods can still count as normal remuneration, even if it does not arise evenly across the year. Retail, logistics, hospitality, manufacturing and care settings frequently fall into this category.
The key question is not whether overtime happens all year, but whether it is expected as part of the annual working pattern.
What the law requires
Holiday pay should reflect normal earnings over time. Seasonal regularity can still meet that test.
What the employer must decide or do
Use the statutory averaging method properly so peaks and troughs are smoothed. Avoid excluding seasonal overtime simply because it is not year-round. Ensure payroll calculations genuinely reflect annual earnings patterns.
What happens if you get it wrong
Seasonal workers are often the most alert to holiday pay discrepancies because peaks are financially significant. Underpayment claims often arise after peak periods when leave is taken.
4. What about overtime premiums and enhanced rates?
Employers often include overtime hours but exclude the premium element. That is a risky distinction.
If the premium is paid regularly and is part of what the worker normally earns when working overtime, excluding it can still reduce pay during leave and create a deterrent effect.
Examples include time-and-a-half or double time worked regularly, enhanced rates for specific shifts, and predictable weekend premiums.
What the law requires
Where the premium is an established part of normal pay, it should not be ignored simply because it is labelled an enhancement.
What the employer must decide or do
Decide whether enhanced rates are part of normal remuneration for specific roles. Avoid blanket exclusions without evidence. Ensure payroll systems can capture premium elements accurately in averaging.
What happens if you get it wrong
Premiums are often the difference between a marginal and a material underpayment. They also attract attention in tribunal schedules of loss.
5. How should employers treat allowances and supplements linked to overtime?
Allowances frequently interact with overtime and are often overlooked.
Allowances that may count include shift allowances, on-call payments, standby or call-out payments, and location-based supplements linked to working patterns.
The test is whether the allowance is intrinsically linked to the work performed and paid with sufficient regularity.
What the law requires
Payments that are a normal part of doing the job should not disappear during leave if that would reduce pay materially.
What the employer must decide or do
Audit allowances alongside overtime, not separately. Decide which allowances are compensatory expenses and which are pay for work, then document the rationale.
What happens if you get it wrong
Allowance misclassification often creates disputes that are harder to resolve because employers conflate expenses and pay. Clear categorisation is essential.
6. Does TOIL change whether overtime counts as normal remuneration?
TOIL does not remove holiday pay obligations.
If overtime is routinely compensated with time off rather than pay, employers must still consider whether overtime pay would normally have been received and whether holiday pay should reflect that pattern. TOIL arrangements can obscure the true earnings pattern if not tracked properly.
What the law requires
TOIL cannot replace statutory holiday entitlement. Holiday pay must still reflect normal remuneration.
What the employer must decide or do
Align TOIL policy with holiday pay calculations. Ensure TOIL does not mask regular overtime patterns. Track TOIL accurately and separately from statutory leave. For practical guidance, see time off in lieu (TOIL).
What happens if you get it wrong
Poor TOIL governance often leads to double disputes: unpaid overtime on one side and underpaid holiday pay on the other.
Section B summary
Deciding whether overtime counts as normal remuneration is not about finding a loophole. It is about creating a repeatable, evidence-based decision framework that reflects how your business actually operates. Employers who take a structured approach reduce dispute risk dramatically. Those who rely on labels or assumptions tend to discover problems only after claims have already crystallised.
Section C: How should employers calculate holiday pay when overtime is included?
Once an employer accepts that overtime forms part of normal remuneration, the risk shifts from eligibility disputes to calculation errors. Most claims do not succeed because employers misunderstood the law. They succeed because employers applied the right principle using the wrong mechanics.
1. What reference period must employers use when overtime affects pay?
Where pay varies because of overtime, the Working Time Regulations require employers to calculate holiday pay using an averaging reference period designed to reflect typical earnings.
For most variable-pay workers, this means using the last 52 paid weeks before the holiday is taken. Weeks in which no pay was received must be excluded, and the employer must look back further to find 52 paid weeks where necessary, up to a maximum look-back of 104 weeks.
This rule exists to smooth out peaks and troughs in earnings so holiday pay reflects what the worker normally earns over time, not what they happened to earn in a short snapshot period.
What the law requires
Use a 52-week reference period for workers with variable pay. Exclude weeks with no pay and extend the reference period backwards as required. If the worker has fewer than 52 paid weeks, use the number of weeks actually worked.
What the employer must decide or do
Ensure payroll systems are capable of excluding zero-pay weeks automatically. Decide how far back payroll will look for newer starters or workers with breaks in pay. Confirm that averaging includes all qualifying elements of pay, not just basic pay.
What happens if you get it wrong
Including zero-pay weeks or truncating the reference period artificially suppresses the average. These errors are easy for claimants to demonstrate using payslips and are difficult to defend once identified.
2. How do employers calculate holiday pay once overtime qualifies?
The calculation itself is straightforward in theory but often flawed in execution.
The compliant approach is to identify all qualifying pay elements that form part of normal remuneration, total those earnings for each paid week in the reference period, divide by the number of paid weeks to calculate average weekly pay and apply that average to the period of statutory leave taken.
The risk lies in what gets included and how consistently it is applied.
What the law requires
Holiday pay must reflect normal remuneration for the relevant statutory leave entitlement.
What the employer must decide or do
Maintain a definitive list of pay elements included in holiday pay calculations. Ensure overtime premiums, allowances and supplements are captured correctly. Test payroll outputs against manual calculations periodically.
What happens if you get it wrong
Small weekly underpayments compound quickly. Errors tend to repeat across multiple leave periods, which is how routine payroll issues become significant liabilities.
3. Should employers use a split approach for different parts of statutory leave?
Many employers distinguish between the first 4 weeks of statutory leave and the additional 1.6 weeks of UK leave.
This approach can be lawful, but only if it is operationally robust.
What the law requires
Employers must pay statutory holiday pay correctly for leave taken. If different calculation methods are used, the employer must be able to identify which leave is being taken at any given time.
What the employer must decide or do
Decide whether the administrative complexity of a split approach is worth the potential savings. Define the order in which leave is deemed taken, typically starting with statutory leave. Ensure managers, employees and payroll apply the same rules consistently.
What happens if you get it wrong
Where leave is not clearly ordered or tracked, tribunals tend to treat inconsistencies against the employer. Many disputes arise not because the split approach is unlawful, but because it is not applied coherently.
4. How do the 2024 reforms affect calculation methods for irregular hours and part-year workers?
For leave years beginning on or after 1 April 2024, employers can use new calculation methods for irregular hours workers and part-year workers.
These reforms allow statutory holiday entitlement to accrue proportionally to hours worked and permit rolled-up holiday pay, provided it is itemised and transparent.
What the law requires
The worker must genuinely fall within the irregular hours or part-year category. Accrual and pay methods must be applied consistently for the relevant leave year. Rolled-up holiday pay must be clearly shown and must correspond to actual entitlement.
What the employer must decide or do
Identify which workers qualify under the new definitions. Decide whether rolled-up holiday pay simplifies or complicates workforce management. Update contracts, payslips and payroll logic to reflect the chosen method.
What happens if you get it wrong
Misapplying accrual or rolled-up pay to the wrong workers can invalidate the entire approach. This creates immediate underpayment risk and undermines employer credibility in any dispute.
5. How should employers handle leavers where overtime affects holiday pay?
Leavers are where historic errors surface.
Holiday pay on termination must reflect the worker’s entitlement and pay position at the point employment ends. If overtime has been part of normal remuneration, it must be reflected in any payment in lieu of untaken statutory leave.
What the law requires
Payment in lieu of untaken statutory leave must be calculated using the same principles as holiday pay during employment.
What the employer must decide or do
Ensure leaver calculations use the correct reference period. Audit final pays to ensure overtime has been included where required. Recognise that termination payments are often scrutinised more closely than ongoing payroll.
What happens if you get it wrong
Leavers have less incentive to stay silent. Many holiday pay claims are triggered by final pay disputes rather than ongoing underpayments.
Section C summary
Calculating holiday pay where overtime is included is not conceptually difficult, but it is operationally unforgiving. Employers must align legal principles with payroll reality. Reference periods, pay element mapping, leave ordering and worker classification all need to work together. Where they do not, underpayments repeat silently until they surface as claims.
Section D: What are the legal, financial and operational risks if overtime is excluded incorrectly?
Most employers do not face holiday pay risk because they deliberately underpay. They face risk because overtime evolves over time, payroll rules remain static and no one revisits the assumptions that once made sense.
When overtime is excluded incorrectly from holiday pay, the consequences rarely stay confined to payroll. They escalate into legal exposure, cost volatility and operational disruption.
1. What legal claims can arise from incorrect overtime holiday pay?
The primary legal mechanism is a claim for unlawful deduction from wages under the Employment Rights Act 1996. Holiday pay underpayments fall squarely within this framework.
Employees or workers may argue that each instance of underpaid holiday pay forms part of a “series of deductions” linked by a common cause, typically the employer’s calculation method.
Claims are usually preceded by ACAS Early Conciliation and are commonly pursued once an individual becomes aware that colleagues are affected in the same way.
What the law requires
Employers must pay statutory holiday pay correctly. Where they do not, workers are entitled to seek recovery through the tribunal system.
What the employer must decide or do
Understand that once a calculation issue is identified, it rarely remains an isolated case. Decide whether early correction and remediation reduces exposure compared to defending claims individually.
What happens if you get it wrong
Tribunal claims consume management time and legal budget. Even where liability is limited, the distraction and reputational impact can be disproportionate to the sums involved.
2. How far back can employees recover underpaid holiday pay?
In Great Britain, claims for unlawful deductions from wages are generally subject to a two-year backstop under the Deduction from Wages (Limitation) Regulations 2014.
However, this does not mean exposure is trivial. The two-year period runs back from the date of the claim, and time limits generally run from the last deduction in a series. Where overtime is common, the cumulative value of underpayments can still be substantial.
What the law requires
Employers must comply with statutory time limits and be prepared to evidence payment history.
What the employer must decide or do
Assess historic exposure realistically. Decide whether proactive correction, settlement or policy change reduces risk. Avoid assuming the two-year cap removes the need for action.
What happens if you get it wrong
Employees often calculate exposure themselves once a pattern is identified. Employers then lose control over timing, messaging and settlement strategy.
3. Can HMRC or regulators become involved?
Holiday pay disputes are primarily enforced through employment tribunals, not routine HMRC audits. However, regulatory risk can arise indirectly.
Where underpaid holiday pay causes pay to fall below National Minimum Wage thresholds in certain pay periods, HMRC can become involved. This is more likely in lower-paid, overtime-heavy roles.
What the law requires
Employers must ensure compliance with both holiday pay and minimum wage obligations.
What the employer must decide or do
Model the interaction between holiday pay calculations and minimum wage compliance. Identify roles where overtime and holiday pay errors could trigger wider regulatory risk.
What happens if you get it wrong
Minimum wage enforcement brings penalties, naming and shaming risk and reputational damage that far exceeds the original holiday pay issue.
4. What are the operational and employee relations impacts?
Holiday pay disputes often damage trust more than they damage finances.
Employees perceive underpaid holiday pay as a fairness issue. Once trust erodes, grievances multiply, absence management becomes harder and engagement drops.
Operationally, payroll teams are forced into retrospective corrections, managers face questions they cannot answer and HR spends time firefighting rather than planning.
What the law requires
There is no direct statutory requirement to maintain morale, but tribunals look unfavourably on opaque or inconsistent pay practices.
What the employer must decide or do
Treat holiday pay transparency as part of workforce governance. Communicate clearly how pay is calculated. Train managers to explain outcomes accurately.
What happens if you get it wrong
Even where legal exposure is limited, employee relations damage can persist long after the financial issue is resolved.
5. Why payroll consistency matters more than theoretical accuracy
Employers sometimes focus on finding the most technically aggressive interpretation of the law. In practice, consistency matters more.
A conservative, consistently applied approach that slightly over-includes pay elements is often easier to defend than a complex, narrowly optimised model that produces inconsistent results.
What the law requires
Correct payment of statutory holiday pay.
What the employer must decide or do
Balance cost control against dispute risk. Ensure payroll outputs match policy intent every time. Test calculations across scenarios.
What happens if you get it wrong
Inconsistent outcomes undermine credibility. Once credibility is lost, even defensible positions become harder to sustain.
Section D summary
The real risk of excluding overtime from holiday pay incorrectly is not just legal liability. It is loss of control. Once claims arise, employers react rather than decide. A structured, auditable approach keeps decision-making with the employer, not the tribunal.
Section E: What are the most common employer mistakes with holiday pay on overtime?
Most holiday pay disputes do not arise because the law is unclear. They arise because employers rely on assumptions that no longer match how work is actually done. Overtime evolves quietly. Payroll rules often do not.
Understanding where employers typically fail allows HR and finance teams to intervene before underpayments become systemic.
1. Treating contractual wording as decisive
One of the most persistent errors is assuming that contractual labels settle the issue.
Employers often rely on phrases such as “voluntary overtime”, “non-contractual overtime” or “discretionary overtime” as a basis for exclusion. In practice, tribunals look beyond labels to how work is actually performed and paid.
If overtime is routinely offered, regularly worked and expected as part of workforce planning, contractual language will not protect the employer from a normal remuneration finding.
What the law requires
Holiday pay must reflect actual earnings patterns, not just contractual descriptions.
What the employer must decide or do
Review overtime at an operational level. Compare contracts to rota data and payslips. Where practice diverges from wording, adjust calculations or change how overtime is offered.
What happens if you get it wrong
Contracts are rarely decisive evidence in holiday pay disputes. Payroll data usually is.
2. Excluding voluntary overtime by default
Many payroll systems are configured to exclude voluntary overtime automatically. This approach is increasingly risky.
Voluntary overtime can still be normal remuneration if it is worked with sufficient regularity. Employers who exclude it without assessing patterns often discover underpayments only when workers compare holiday pay outcomes.
What the law requires
A fact-based assessment of whether voluntary overtime is regular and settled.
What the employer must decide or do
Identify roles where voluntary overtime is relied upon operationally. Decide whether it is genuinely exceptional or part of the expected working pattern. Update payroll rules accordingly.
What happens if you get it wrong
Voluntary overtime claims tend to spread quickly because workers can evidence patterns easily.
3. Including overtime hours but excluding premium elements
Another common mistake is including overtime at basic rate while excluding enhanced elements such as time-and-a-half or weekend premiums.
Where enhanced rates are paid regularly, excluding them can still reduce holiday pay materially. The premium is part of what the worker normally earns when working overtime.
What the law requires
Holiday pay should reflect normal remuneration, including regular premiums linked to work performed.
What the employer must decide or do
Assess whether premiums are predictable and routinely paid. Avoid blanket exclusions of enhancements without evidence. Ensure payroll can capture premium pay correctly.
What happens if you get it wrong
Premium exclusions often drive the largest monetary shortfalls in tribunal schedules of loss.
4. Using outdated reference period rules
Some employers still apply historic 12-week reference periods, particularly where payroll systems have not been updated.
This is no longer compliant for variable pay workers. The statutory reference period is 52 paid weeks, with zero-pay weeks excluded and a maximum 104-week look-back.
What the law requires
Use a 52-week reference period for variable pay calculations.
What the employer must decide or do
Audit payroll configuration. Identify legacy settings. Retrain payroll teams where old practices persist.
What happens if you get it wrong
Reference period errors are easy to identify and difficult to defend once exposed.
5. Failing to define leave ordering where split methods are used
Employers who use different calculation methods for different parts of statutory leave often forget to define which leave is taken first.
Without a clear ordering rule, managers, employees and payroll apply assumptions inconsistently. This inconsistency undermines the entire approach.
What the law requires
Employers must be able to identify which leave entitlement applies to each holiday taken.
What the employer must decide or do
Set an explicit leave-ordering rule in policy. Apply it consistently. Train managers and payroll teams.
What happens if you get it wrong
Tribunals typically resolve ambiguity against the employer.
6. Misapplying 12.07% accrual or rolled-up holiday pay
Following the April 2024 reforms, some employers have applied accrual or rolled-up holiday pay too widely.
These methods apply only to qualifying irregular hours and part-year workers and only for relevant leave years.
What the law requires
Correct worker classification and correct application of the new methods.
What the employer must decide or do
Confirm which workers qualify. Update contracts and payslips. Avoid applying these methods to standard full-time or fixed-hours staff.
What happens if you get it wrong
Misapplication can invalidate the approach entirely and trigger immediate underpayment risk.
7. Ignoring historic underpayments
Employers often correct holiday pay calculations going forward but leave historic underpayments untouched.
While claims are generally capped at two years, ignoring past exposure removes the employer’s ability to control timing and messaging.
What the law requires
There is no obligation to remediate proactively, but historic liability remains.
What the employer must decide or do
Assess exposure. Decide whether remediation or settlement reduces overall risk. Take advice before claims arise.
What happens if you get it wrong
Employees often discover historic underpayments independently, triggering coordinated claims.
Section E summary
Holiday pay on overtime fails in predictable ways. Employers who audit overtime patterns, update payroll mechanics and document decisions avoid most disputes. Those who rely on assumptions or legacy systems usually discover the problem only after claims have already crystallised.
Section F: How should employers build a defensible decision framework for holiday pay on overtime?
At this stage, employers need to move away from legal theory and towards a **repeatable internal framework**. This is what allows HR, payroll and managers to make consistent decisions that withstand scrutiny from employees, advisers and tribunals.
A defensible framework does three things. It translates legal principles into operational rules. It reduces reliance on individual judgement. It creates an evidence trail that explains outcomes.
1. Step one: classify the worker correctly
Everything that follows depends on correct worker classification.
Employers must identify whether the individual is a standard employee or worker with predictable hours, an irregular hours worker, or a part-year worker. This distinction matters because post-1 April 2024 accrual and rolled-up holiday pay options apply only to qualifying irregular hours and part-year workers.
Misclassification is one of the fastest ways to invalidate an otherwise compliant approach.
What the law requires
Statutory holiday entitlement and calculation methods must align with the worker’s legal category under the Working Time Regulations.
What the employer must decide or do
Apply a consistent definition of “irregular hours” and “part-year” across the organisation. Base classification on reality, not convenience. Review classification periodically as working patterns change.
What happens if you get it wrong
If the wrong calculation method is applied, holiday pay can be challenged in full, not just at the margins, undermining payroll credibility.
2. Step two: map all pay elements, not just overtime
Before calculating anything, employers need a complete map of pay.
This should include basic pay, compulsory overtime, non-guaranteed overtime, voluntary overtime, overtime premiums, shift allowances, on-call or standby payments and commission or productivity-related pay. Many disputes arise because overtime is assessed in isolation while associated payments are overlooked.
What the law requires
Holiday pay must reflect normal remuneration, which may consist of multiple pay elements.
What the employer must decide or do
Create a definitive list of pay elements. Decide which are intrinsically linked to work and paid regularly. Align payroll coding so those elements can be averaged accurately. Consider interaction with wider hours and pay compliance.
What happens if you get it wrong
Overlooking one pay element often results in systematic underpayment across multiple leave periods.
3. Step three: define what “normal remuneration” means for your business
This is where employers must make a policy decision.
The law provides principles, not formulas. Employers must decide how to apply those principles in a way that reflects their operating model and risk appetite.
What the law requires
Payments that are regular, settled and linked to work should not be excluded if doing so would reduce pay during statutory leave.
What the employer must decide or do
Set internal criteria for regularity and predictability. Decide how seasonal peaks are treated. Apply criteria consistently across comparable roles. Document the rationale so it can be explained later.
What happens if you get it wrong
Inconsistent inclusion decisions are often more damaging than conservative over-inclusion.
4. Step four: choose a calculation strategy and leave ordering rule
Employers must choose between a harmonised approach, where normal remuneration is used across all statutory leave, and a split approach, where different rules apply to different parts of the entitlement.
Both can be lawful. Only one is usually manageable.
What the law requires
Whichever approach is chosen must be applied transparently and accurately.
What the employer must decide or do
Assess whether payroll can reliably support a split approach. Define leave ordering clearly if different calculations apply. Train managers and payroll teams so the rules are applied consistently.
What happens if you get it wrong
A split approach without robust systems often fails under scrutiny and invites dispute.
5. Step five: configure payroll and test outcomes
Even a sound legal approach fails if payroll cannot execute it correctly.
What the law requires
Holiday pay must be calculated accurately for each period of leave taken.
What the employer must decide or do
Configure payroll to use the correct 52-week reference period. Exclude zero-pay weeks automatically. Test calculations against manual examples. Build exception reporting for anomalies. Ensure record-keeping meets working time compliance standards, including working time record-keeping duties.
What happens if you get it wrong
Payroll errors replicate at scale and create repeat liabilities.
6. Step six: document decisions and prepare for challenge
Holiday pay disputes are evidence-driven. Employers who can explain why a calculation was made are in a stronger position than those who can only explain how.
What the law requires
Employers must be able to demonstrate compliance.
What the employer must decide or do
Record policy decisions and rationale. Retain payroll and working time records. Keep evidence accessible for audit, grievance or tribunal proceedings.
What happens if you get it wrong
Without documentation, tribunals often infer that underpayments were negligent or systemic.
Section F summary
A defensible approach to holiday pay on overtime is built on structure, not instinct. Employers who classify workers correctly, map pay elements, define normal remuneration clearly and align payroll execution significantly reduce risk. Those who rely on informal practice usually discover exposure only once claims arise.
Section G: Conclusion – what employers should do now
Holiday pay on overtime is no longer a peripheral payroll issue. It is a **core compliance and risk-management concern** that sits across employment law, payroll governance, cost control and employee relations.
The legal position is settled in principle. Where overtime forms part of a worker’s **normal remuneration**, it must be reflected in statutory holiday pay. The challenge for employers is not understanding the rule, but applying it consistently in a way that reflects real working patterns and can be defended under scrutiny.
From a practical and commercial perspective, employers should now take the following actions:
– review overtime patterns across roles, departments and sites, not just contractual wording
– decide, at policy level, what constitutes normal remuneration in their business
– select a calculation strategy that payroll can operate reliably at scale
– ensure worker classification is correct, particularly following the post-April 2024 reforms for irregular hours and part-year workers
– audit payroll outputs and historic exposure before disputes arise
– document decisions clearly so they can be explained and evidenced if challenged
There is no requirement to eliminate all risk. There is, however, a requirement to **make informed, consistent decisions**. Employers who do this retain control over cost, timing and narrative. Employers who do not typically encounter holiday pay risk only after claims have crystallised, when options narrow and leverage shifts.
A compliance-grade approach to holiday pay on overtime is therefore not about minimising pay. It is about **minimising uncertainty and avoiding preventable disputes**.
Section H: FAQs – Holiday Pay on Overtime (UK Employers)
1. Do employers have to include overtime in holiday pay?
Yes, where the overtime forms part of the worker’s normal remuneration. This can include compulsory, non-guaranteed and voluntary overtime if it is worked regularly and predictably. The legal focus is on actual earnings patterns, not contractual labels.
2. Is voluntary overtime included in holiday pay?
Voluntary overtime can be included if it is worked with sufficient regularity to be considered normal remuneration. Employers cannot safely exclude voluntary overtime simply because it is described as optional if, in practice, it is routinely worked.
3. Is overtime included in all statutory holiday or only part of it?
Many employers distinguish between the first 4 weeks of statutory leave and the additional 1.6 weeks. Overtime is most clearly required to be reflected in holiday pay for the core statutory entitlement. There is no statutory prohibition on applying normal remuneration across the full 5.6 weeks, and many employers do so to reduce complexity and dispute risk.
4. How should holiday pay be calculated where overtime varies?
Where pay varies, holiday pay is generally calculated using the **average pay over the last 52 paid weeks**, excluding weeks where no pay was received. All qualifying elements of normal remuneration, including overtime where applicable, must be included in the averaging process.
5. What changed in April 2024 for irregular hours and part-year workers?
For leave years beginning on or after 1 April 2024, employers can use accrual-based methods and rolled-up holiday pay for **qualifying irregular hours and part-year workers**. These methods must only be applied to the correct worker categories and must be documented, itemised and applied consistently.
6. Can employers use time off in lieu (TOIL) instead of paying overtime in holiday pay?
TOIL cannot replace statutory holiday entitlement. Even where overtime is compensated with TOIL, employers must still assess whether overtime forms part of normal remuneration and ensure holiday pay is calculated correctly.
7. How far back can employees claim unpaid holiday pay?
In most cases in Great Britain, unlawful deduction claims are capped at **two years’ arrears**. However, time limits generally run from the last deduction in a series, and cumulative underpayments can still be significant where overtime is common.
8. What is the highest risk area for employers?
The highest risk arises where overtime is **culturally expected but contractually described as voluntary**, and payroll systems default to basic pay for holiday calculations. Inconsistent treatment between comparable workers is also a frequent trigger for disputes.
9. How often should employers review their holiday pay approach?
Holiday pay policies and payroll calculations should be reviewed **at least annually**, and whenever working patterns, overtime practices or legal rules change. Regular audits are significantly less costly than defending tribunal claims.
Section H summary
Holiday pay on overtime requires employers to make deliberate, evidence-based decisions. Clear policy, accurate payroll execution and consistent application reduce the likelihood of disputes and strengthen the employer’s position if challenges arise.
Section I: Glossary
| Term | Definition |
|---|---|
| Holiday Pay | The pay a worker is legally entitled to receive when taking statutory annual leave under the Working Time Regulations 1998. For workers with variable pay, this may require averaging earnings rather than paying basic salary only. |
| Overtime | Hours worked in excess of a worker’s contracted hours. Overtime may be compulsory, non-guaranteed or voluntary depending on contractual terms and working practices. |
| Compulsory Overtime | Overtime that a worker is contractually required to work if requested by the employer. |
| Non-Guaranteed Overtime | Overtime that the employer is not obliged to offer, but which the worker must work if it is offered. |
| Voluntary Overtime | Overtime that neither the employer is obliged to offer nor the worker is obliged to accept. It may still form part of normal remuneration if worked regularly. |
| Normal Remuneration | The pay a worker normally receives when working. This can include basic pay, overtime, allowances, premiums and commission where these are regular, settled and intrinsically linked to the role. |
| Statutory Holiday Entitlement | The minimum paid annual leave entitlement under UK law, currently 5.6 weeks per leave year for full-time workers. |
| Regulation 13 Leave | The first 4 weeks of statutory holiday entitlement derived from the Working Time Directive. |
| Regulation 13A Leave | The additional 1.6 weeks of statutory holiday entitlement provided under UK domestic law. |
| Reference Period | The period used to calculate average holiday pay where earnings vary. In most cases this is the last 52 paid weeks, excluding weeks where no pay was received, with a maximum 104-week look-back. |
| Irregular Hours Worker | A worker whose paid hours in each pay period during the leave year are wholly or mostly variable, for whom special accrual and holiday pay rules may apply from April 2024. |
| Part-Year Worker | A worker who is only required to work for part of the year and has periods of at least one week where no work is required, excluding paid leave. |
| Rolled-Up Holiday Pay | A method of paying holiday pay as an uplift to hourly pay, permitted from April 2024 for qualifying irregular hours and part-year workers if applied transparently and correctly. |
| Time Off in Lieu (TOIL) | Time off granted instead of payment for overtime worked. TOIL cannot replace statutory holiday entitlement. |
| Unlawful Deduction from Wages | A legal claim under the Employment Rights Act 1996 used by workers to recover underpaid holiday pay. |
| Series of Deductions | A sequence of underpayments linked by a common cause, often relied upon in holiday pay claims to recover multiple underpayments over time. |
Section J: Useful Links
| Resource | Link |
|---|---|
| Working Time Regulations 1998 | legislation.gov.uk – Working Time Regulations 1998 |
| GOV.UK – Holiday Entitlement | gov.uk/holiday-entitlement-rights |
| GOV.UK – Calculating Holiday Pay | gov.uk/calculate-your-holiday-entitlement |
| ACAS – Holiday Pay Guidance | acas.org.uk/holiday-pay |
| CIPD – Holiday Entitlement Factsheet | cipd.co.uk – Holiday Entitlement |
| DavidsonMorris – Employment Law Hub | davidsonmorris.com/employment-law |
| DavidsonMorris – Working Time Regulations 1998 Guide | davidsonmorris.com/working-time-regulations-1998 |
| DavidsonMorris – Time Off in Lieu | davidsonmorris.com/time-off-in-lieu |
| DavidsonMorris – Pay and Deductions | davidsonmorris.com/pay-and-deductions |
