When does overtime become contractual?

Overtime rules are not always straightforward, but it’s important for employers and managers to have a clear understanding to avoid workforce issues.

The question ‘When does overtime become contractual?’ is one that commonly arises within a number of different employment contexts, from whether an employer has the right to insist on an employee working additional hours to when the employee has the right to be paid extra for this. It can also arise when calculating an employee’s correct pay entitlement, based on their average weekly pay, for example, in the context of holiday pay or pay in lieu of notice.

The following guide for line managers and HR personnel, as well as those responsible for payroll, looks at the rules relating to overtime to help answer this frequently asked question.

What are the overtime rules?

Many employees will be contractually required to work a fixed number of hours each week, in return for a specified salary. Typically, these standard working hours and pay will be set out within a contract of employment or any written statement of employment particulars, where any time worked in excess of these normal hours will usually be classed as overtime.

In some cases, the employment contract may make express provision for working additional hours including, for example, what constitutes overtime, whether the employee is contractually obliged to undertake overtime, when an employer can request overtime or an employee can refuse this, and how any overtime pay will be calculated.

How overtime is treated will be determined by the specific contractual arrangements between the employer and employee, or any subsequent agreement made between the parties where the need arises.

When does overtime become contractual?

By law, there’s no statutory obligation on an employee to work overtime. This means that an employer cannot insist on an employee working late or longer hours, on either an ad hoc or regular basis, unless there is contractual provision which permits this. Equally, there’s no statutory obligation on the employer to offer any overtime. This means that the right to work additional hours will again depend on the provisions of the employment contract.

Where the contract of employment incorporates overtime arrangements, this can be done in one of three ways: on a voluntary basis; compulsory and guaranteed; or compulsory and non-guaranteed. Voluntary overtime is where there’s no contractual obligation on an employer to offer additional hours, nor any obligation on the employee to work those hours if offered. However, the contract will allow the employee to work extra hours, if and when overtime is available, for example, to cover any sudden and unplanned staff shortages.

In relation to compulsory overtime, there are two different types: guaranteed and non-guaranteed. Guaranteed overtime refers to extra work that an employer is contractually obliged to offer and an employee is obliged to accept. This is often used, for example, where the need for extra staff is anticipated in advance of a regular increase in orders from a client.

In contrast, non-guaranteed overtime is where the employer may or may not offer overtime but, if offered, the employee is obliged to undertake these extra hours. In these circumstances the contract may make provision for the employee to do ‘a reasonable amount of overtime from time to time’ either according to the needs of the business, or whatever hours are necessary to complete a particular task after their shift has ended.

However, in the case of compulsory overtime, even though this is a legitimate way of requiring employees to work extra hours, employers must be careful not to discriminate against those with a protected characteristic, for example, women with caring responsibilities or anyone suffering from a disability that prevents them from working long hours.

Can employees refuse to work overtime?

As overtime is always contractual, absent any express provision or agreed arrangement, employees cannot be forced to work extra hours. Equally, if they refuse to work overtime where they’re not contractually obliged to do so, they should not be subjected to any detriment. This means that any refusal should not result in unfair treatment at work.

In contrast, where overtime is contractual, on either a compulsory guaranteed or non-guaranteed basis, there may be serious consequences for an employee in refusing to work extra hours when required. This would constitute a potential breach of contract for which the employer could take disciplinary action against the employee for misconduct.

This means that it’s important to set out the type of overtime that’s in place, where the employment contract must make it clear if any overtime is compulsory, as this will impact how an employer can deal with an employee who refuses to work extra hours where required.

Can employers refuse to provide overtime?

Where an employer isn’t contractually obliged to provide overtime, they can refuse to offer additional hours over an employee’s standard hours. Similarly, unless the employment contract guarantees overtime, an employer can stop an employee from working it.

However, employers should exercise caution when preventing an employee from working overtime whilst allowing others to do so, as this could be construed as discriminatory. For example, part-time employees must not be treated less favourably than full-time employees.

Can the amount of overtime be capped?

By law, there’s a limit on the number of hours that an employee can work each week, including overtime, although these hours are calculated on an average basis. Under the working time directive, an employee cannot usually work more than an average of 48 hours per week, typically taken over a 17-week period, unless they’ve opted out of these provisions.

This means that provided written agreement has been reached for the employee to opt-out of the 48-hour weekly limit, any overtime won’t need to be capped. Otherwise, the employee can still work more than 48 hours in a single week, but only where it’s possible to reduce their average working hours to the statutory maximum within the 17-week reference period.

When calculating an employee’s average working hours, this will include paid overtime and any unpaid overtime that the employee has been asked to do, but doesn’t include any unpaid overtime that the employee has volunteered for, such as staying late to finish something off.

What is an employee’s entitlement to overtime pay?

In the same way that there’s no legal obligation on an employee to work overtime, except where the employment contract provides otherwise, employers are not obliged to pay their staff for additional hours worked in excess of their normal working hours.

This means that any right to overtime pay must be set out within the employment contract or agreed between the employer and employee. The contract may provide for any additional hours worked to be paid at the normal rate of pay, for example, in the case of a shift overrun. However, many employers will often offer an enhanced rate, such as time and a half, either as an incentive for employees to work voluntary overtime or as a way of maintaining positive working relations where employees are required to work compulsory overtime.

For employers that choose not pay for overtime, for example, where a contract pays an annual salary and requires staff to be occasionally flexible, they must be careful that an employee’s average pay for the total number of hours worked doesn’t fall below the national minimum wage. By law, almost all workers in the UK are entitled to be paid a minimum amount per hour, depending on their age, plus a special rate for apprentices.

For 2021-2022, the minimum wage rates are (and set to increase for 2022):

• 23 and over: £8.91 (£9.50)
• 21 to 22: £8.36 (£9.18)
• 18 to 20: £6.56 (£6.83)
• Under 18: £4.62 (£4.81)
• Apprentice: £4.30 (£4.81)

The apprentice rate will apply if the individual is either aged under 19, or 19 or more and in the first year of their apprenticeship. An apprentice aged over 19 and who has completed the first year of their apprenticeship will be entitled to the appropriate rate for their age.

When calculating the minimum pay per hour, the average pay for the total hours worked must not fall below the relevant minimum wage rate for the individual’s pay reference period. This period is usually set by how often a person is paid, for example, weekly or monthly.

How does overtime & time off in lieu work?

Instead of paying for any overtime worked, the employment contract or any subsequent agreement between the parties can instead allow for any overtime worked to be taken back at a later date, as time off in lieu (TOIL). This is in addition to any annual leave entitlement.

It’s up to the employer whether TOIL is available. The contract of employment should therefore make provision for the circumstances in which TOIL will be offered, how much TOIL can be accrued, when TOIL can be taken and what happens to any TOIL when employment comes to an end. There should also be a procedure for recording overtime hours.

Overtime pay & entitlements

For employers who choose to pay for overtime, the question ‘When does overtime become contractual?’ is especially pertinent when it comes to pay and entitlements. This is because the average number of hours that an employee has worked within any given pay reference period can significantly impact their entitlement to holiday pay and pay in lieu of notice.

In the context of holiday pay, compulsory overtime must be included for the first 4 weeks of any statutory annual leave entitlement as an absolute minimum. However, there are no other hard and fast rules here, where much will depend on the nature of the overtime.

Most employers will take into account any overtime that the employee was contractually bound to undertake when calculating pay entitlement. Equally, in accordance with recent court rulings, any regular but voluntary overtime should also be factored in, provided any pattern of work is sufficiently regular to be considered part of the employee’s normal weekly remuneration. As holiday pay and pay in lieu must be calculated on the basis of the employee’s normal pay, if an employee usually works overtime, this ought be included in the calculation.

How should overtime be managed?

There are various reasons why a need for overtime may arise. In some cases this may be anticipated, whilst in others it may be unexpected, for example, due to sickness-related staff shortages. In either case, it’s important for employers to be able to meet the needs of their business, but also to ensure that overtime arrangements are fair and don’t fall foul of the law.

The importance of making clear contractual provision for overtime cannot be underestimated. In this way, staff will fully understand what’s expected of them when it comes to working overtime, on either a compulsory or voluntary basis, and the incentive for so doing.

Absent any express contractual overtime provisions, arrangements can still be agreed to work and be rewarded for overtime, either by way of overtime pay or time off in lieu, but having this clearly set out in writing from the outset can help to minimise any potential for dispute.

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.