If your employees regularly work overtime, that overtime has to be included in their holiday pay. It's a legal requirement under the Working Time Regulations 1998, and it applies to voluntary overtime just as much as compulsory overtime, provided it's worked regularly enough to be part of normal pay.
Many UK employers are still getting this wrong. And from April 2026, the consequences got more serious: the new Fair Work Agency can now inspect payroll records and enforce holiday pay compliance directly, without waiting for an employee to raise a tribunal claim.
This guide covers what the law requires, which types of overtime count, how to calculate it correctly using the 52-week reference period, and what happens if you get it wrong.
Does holiday pay have to include overtime in the UK?
Yes. Under the Working Time Regulations 1998 and the Employment Rights Act 1996, holiday pay must reflect an employee's normal remuneration; what they typically earn, not just their basic contracted rate.
The key case is Dudley Metropolitan Borough Council v Willetts (2017), in which the Employment Appeal Tribunal ruled that regular voluntary overtime must be included in holiday pay calculations. The ruling established that whether a payment counts depends on whether it is "regular and settled", not whether it is contractually guaranteed.
Subsequent cases have reinforced this. Courts have been clear that the burden falls on the employer to demonstrate that overtime is genuinely exceptional before excluding it from the calculation. If overtime appears regularly in an employee's pay, the default assumption is that it should be included.
The law applies to the statutory 5.6 weeks of annual leave. Most employers apply it across the full entitlement to reduce complexity and avoid disputes about which leave was taken in which order.
Which types of overtime count towards holiday pay?
Not all overtime is treated the same. The key question is whether the overtime is regular. Here's how the main types are treated:
| Type of overtime | Included in holiday pay? |
|---|---|
| Compulsory overtime (required by contract) | ✅ Yes — always |
| Non-guaranteed overtime (not required, but must be accepted when offered) | ✅ Yes, if worked regularly |
| Regular voluntary overtime | ✅ Yes, if regular and settled |
| Occasional or one-off overtime | ❌ No — genuinely exceptional payments can be excluded |
There is no statutory definition, but the courts have consistently focused on whether overtime forms part of the employee's normal working pattern. Someone who picks up extra shifts every week is different from someone who covers during a one-off busy period. If a manager would consider the overtime a predictable part of the role, it is likely regular.
The employer cannot rely on overtime being labelled "voluntary" as a reason to exclude it. Willetts settled that point in 2017.
How to calculate holiday pay that includes overtime
For employees with variable pay (which includes anyone whose earnings change because of overtime) holiday pay is calculated using the 52-week reference period, and you should also understand how to calculate overtime pay accurately so that both overtime and holiday pay remain compliant.
The 52-week reference period
Instead of paying holiday at the employee's basic rate, you take the average of their actual earnings over the previous 52 weeks. This smooths out peaks and troughs and produces a figure that reflects what they normally earn.
The rules:
- Use the 52 most recent paid weeks before the holiday is taken
- Exclude any weeks in which no pay was received (sick leave on SSP, statutory maternity/paternity pay, unpaid leave)
- Replace excluded weeks by looking back further, up to a maximum of 104 weeks
- If the employee has been employed for fewer than 52 weeks, use the weeks available
Step-by-step calculation
Here's a practical example for a hospitality worker on an hourly contract:
- Basic weekly pay: £400 (40 hours × £10/hour)
- Regular voluntary overtime: averages 5 hours/week at £10/hour = £50/week
- Total weekly average over 52 paid weeks: £450
When this employee takes a week's annual leave, they should receive £450, not £400. Paying only the basic rate underpays them by £50 per week of holiday.
The formula:
Total pay received across 52 paid weeks ÷ 52 = average weekly holiday pay rate
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Include in the total: basic pay, regular voluntary overtime, compulsory overtime, non-guaranteed overtime (if regular), regular commission, and other regular payments that form part of normal remuneration.
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Exclude: genuinely discretionary bonuses, expense reimbursements, and payments that are truly one-off.
What about part-year and irregular hours workers?
For part-year workers or those with genuinely irregular hours (such as term-time staff or zero-hours workers), the calculation method changed in April 2024. These workers now accrue holiday at 12.07% of hours worked in each pay period, and rolled-up holiday pay (where holiday pay is added as a percentage to each payslip) is permitted, provided it is clearly itemised.
The 52-week averaging method still determines what each unit of leave is worth for these workers. The two calculations serve different purposes: the 12.07% method determines how much leave accrues; the 52-week average determines how much each week of leave pays, so it should sit alongside a clear understanding of holiday accrual rules in the UK.
What happens if you get it wrong?
Excluding regular overtime from holiday pay is an underpayment. Employees have three months minus one day from the date of an underpayment to bring an employment tribunal claim. If underpayments form a series (which is common when payroll has consistently excluded overtime) the claim can cover the full series, potentially extending back several years.
Practical consequences:
- Back pay liability for underpaid holiday, potentially spanning multiple years
- Employment tribunal awards including interest
- Damage to employee trust and retention, particularly in hospitality and retail where pay transparency is increasing
The 2026 change that raises the stakes further:
From April 2026, the Fair Work Agency has the authority to proactively inspect payroll records and enforce holiday pay compliance directly. Employers no longer only face risk from individual employees raising claims. State enforcement and fines are now possible without a worker complaint triggering the process. If your payroll has been systematically excluding overtime from holiday pay, this is a material risk that needs to be fixed before it surfaces in an inspection.
Key points for employers
- Regular overtime (voluntary, non-guaranteed, or compulsory) must be included in holiday pay
- Use the 52-week reference period for any employee whose pay varies
- Exclude zero-pay weeks and extend the look-back period to find 52 paid weeks (maximum 104-week look-back)
- From April 2026, the Fair Work Agency can inspect payroll and enforce compliance proactively
- Accurate time tracking records are your best defence, and your starting point for getting the calculation right
If your payroll currently pays holiday at basic rate only, review your calculations before an inspection makes the decision for you.
How to track overtime accurately for holiday pay purposes
The 52-week calculation is only as good as the data behind it. If overtime hours are recorded informally (in a group chat, on paper, or from memory) the reference period calculation becomes unreliable and difficult to defend.
For shift-based businesses, the most robust approach is to connect time tracking directly to payroll, so every overtime hour is captured at the source, attributed to the right employee, and available for the reference period calculation without manual reconciliation.
Shiftbase's time tracking records actual clock-in and clock-out times, calculates overtime automatically against contracted hours, and connects those hours to your payroll export, reflecting the broader importance of tracking employee hours for payroll accuracy. Absence management sits in the same system, so when an employee takes a week's leave, you have a clean record of their paid weeks to feed into the reference period, no separate spreadsheet required.
For hospitality, retail, and services businesses where overtime patterns vary week to week, this kind of connected record-keeping and time and attendance software is what turns a compliance requirement into something you can actually demonstrate in an inspection.
Try Shiftbase free for 14 days — no credit card required.
