Who doesn’t appreciate holiday pay?

What employers need to know about holiday pay.

Over the past few years, the Government and the Courts have made a number of changes to the law surrounding the calculation of holiday pay which has left many employers, HR professionals and employment lawyers coming out in a cold sweat causing them to lie down in a darkened room with a wet flannel on their head.

It is an area of the law which is developing particularly in the light of the Supreme Court decision in Harpur Trust v Brazel which dealt with the holiday entitlement for ‘part-year workers’ or term time only workers on permanent contracts and held that the 5.6 weeks holiday entitlement under the Working Time Regulations 1998 cannot be reduced to take into account of periods when no work was undertaken.

In response to the Harpur Trust case the Government recently published a consultation paper which proposes to make holiday entitlement under the Working Time Regulations 1998 proportionate to hours worked. However, we will have to wait and see whether the proposed changes will be implemented and in the meantime I have set out the current law below.

How much holiday are workers entitled to?
All workers are entitled to a minimum of 5.6 weeks holiday per holiday year. This includes the usual eight public holidays. The 5.6 weeks amounts to 28 days for a full time employee. Of course employees may receive additional holiday rights under their contract of employment.

Workers with normal working hours
A worker who has normal working hours and their pay does not vary from week to week will simply be paid their normal salary that they would have received had they not been on holiday during any period of annual leave.

Workers with normal working hours whose pay varies
For a worker who has normal working hours but whose pay varies, for example by receiving additional remuneration such as overtime, the Courts have confirmed that a worker should not receive less money in a period of holiday than they would have received had they been working during that time. This is because this could act as a financial disincentive for workers to take holiday. For example, if a worker works and is paid overtime for most weeks they work, but is only paid their basic pay during periods of holiday, they will lose money by taking holiday. Case law has established that workers are entitled to receive ‘normal remuneration’ during periods of holiday.

What is normal remuneration?
‘Normal remuneration’ for the purposes of calculating holiday pay include payments over and above basic salary if the payment is made regularly ‘or over a sufficient period’. The following types of payment are likely to be regarded as part of a worker’s normal remuneration where they are paid on a regular basis over a sufficient period:

  • Commission payments.
  • Overtime pay.
  • Productivity/performance bonuses.
  • Shift allowances and premiums.
  • Travel and other allowances that are treated as taxable remuneration.

The following elements of remuneration should not be included in the calculation of holiday pay:

  • Benefits in kind.
  • Bonus not linked to workers performance.
  • Expenses.
  • One off bonuses and occasional payments.

How are the above payments included in holiday pay?
Where a worker’s pay varies, employers need to calculate a ‘week’s pay’ by taking an average of the pay received by the worker over the previous 52 weeks for which the worker was paid. If for any reason no remuneration was payable to the worker in a particular week, or where the employee is on maternity leave, paternity, adoption, parental, shared parental or parental bereavement leave, then that week should not be used in the calculation and an earlier week must be used. Employers can go back to a maximum of 104 weeks.

Workers who have no normal working hours
This category of workers, for example zero hours workers or casual workers, have caused the most difficulties for employers in relation to their holiday pay arrangements. For many years, employers often paid “rolled up” holiday pay however, this was found to be unlawful by the European Court of Justice and the latest Government guidance states that “holiday pay should be paid for the time when annual leave is taken. An employer cannot include an amount for holiday pay in the hourly rate (known as rolled up holiday pay).”

Employers are now required to calculate a week’s pay by taking an average of all the worker’s pay over a 52 week reference period as set out above. However, this is difficult to work in practice.

As indicated above, the Government recent proposals include a 52 week holiday entitlement reference for part-year workers and workers with irregular hours based on the proportion of time spent working over the previous 52 weeks, including weeks in which no work was done. Holiday entitlement would be calculated in hours at the start of the year, as 12.07% of the hours worked in the previous 52 weeks. However, this is not currently law and in the meantime employers still have the headache of calculating workers with no normal working hours based on a 52 week reference period ignoring weeks when no remuneration was payable to the worker.

Failure to pay holiday pay correctly
Workers can bring claims in the Employment Tribunal for any shortfall in holiday pay. The value of such claims is the difference between the actual holiday pay paid to the worker and the amount that should have been paid. Since 2015, workers can only usually claim shortfalls in holiday pay relating to the period 2 years immediately prior to the claim. It is therefore important that employers ensure that they are paying the appropriate amount of holiday pay, as a failure to do so could be costly if there are a large number of the employer’s workforce being paid incorrectly.

What to look out for
You should consider taking advice on your holiday pay practices if any of the following are relevant:

  • You pay basic salary only for periods of holiday;
  • You do not include commission, bonuses, overtime, shift premiums or other variable payments in your current calculation of holiday pay;
  • You pay rolled up holiday pay;
  • You engage casual staff who have no normal working hours; or
  • You engage self-employed contractors (whether individually or through a personal services company) and have not established whether there is a risk that they could be classified as workers for employment law purposes.

In view of the fact that the calculation of holiday pay has required the Supreme Court to determine how holiday pay should be calculated and that the Government is currently considering making further changes, the need for the cold flannel to the head still remains! In the meantime, employers, particularly those engaging workers with no normal working hours, should check that their holiday pay arrangements meet the current legal requirements.

Alec Colson is a Solicitor and Head of Employment at Taylor Walton LLP and advises The Bingo Association on employment matters. He can be contacted on 01582 390470 or via email alec.colson@taylorwalton.co.uk