The tricky issue of holiday pay!!!

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Holiday and holiday pay is a very emotive issue for employees and employers alike. For employees it’s a well earned break from their hard work for employers, it’s a cost and an operational issue. There have been many recent changes in the law, which have changed the holiday pay landscape – so here are the things that as an employer you need to know.

Holiday entitlement is rooted in the Working Time Directive and the subsequent Regulations, which gives employees/workers 5.6 paid weeks holiday per year (which includes Statutory Bank Holidays) based on full time hours, for part time workers this is pro rata’d. Paid holiday applies to both employees and workers.

However, there is a difference between the two, which says the first 20 days holiday must be paid with all the additions but the rest doesn’t have to. It then becomes even more complicated when you try to work out what the employee is due by way pay. What is their regular pay? Is it calculated to include overtime – guaranteed or non-guaranteed? What about commission? What happens if the employee is on long term sick that crosses over holiday years? These are not easy questions!

Overtime

A few years ago a decision in the Employment Appeal Tribunal changed things and led to back pay for incorrectly calculated holiday pay only being claimed for up to 2 years (it was 6 years).  The case also said that as well as guaranteed overtime, non-guaranteed overtime pay should be included in the holiday pay calculation where it is part of “normal pay” but that a gap of more than 3 months breaks a series of holiday pay underpayments. What is non-guaranteed overtime is still undefined but in essence this is where the Employer is not obliged to offer overtime, but if they do, the employee/worker is obliged to do it. There is then a further complication because the Working Time Directive, which gave all UK employees and workers the right to paid holiday, only gives the right for 20 days paid holiday. The Regulations that followed increased paid holiday to 5.6 weeks. However….  we have a gap between the two –the right to overtime, guaranteed and non-guaranteed applies to the first 20 days holiday not the full 5.6 weeks !


Commission

Then came a more recent case, which established that regular commission payments and allowances, which are “intrinsically linked” to performing the role (such as flying time for pilots), should be included when calculating holiday pay. So, holiday pay should include allowances and commission. Again, this decision applies to the first 20 days holiday under the Working Time Directive not the full 5.6 weeks under the later Regulations. This could change however so watch this space.

Travel Time

The earlier case also decided that travel time, that is not part of the workers usual commute to work should also be considered when calculating holiday pay, but again only applies to the first 20 days not the full 5.6 weeks. So what does that mean. If Fred lives in Bicester but works in Oxford – his normal commute to and from work is not covered. However, if he is then working at a client’s everyday for 12 weeks in London and is paid by the hour, which includes travel time to and from clients, this extra time will need to be included if in week 13 he has some holiday. For example, it may add an extra 11/2 hours pay a day to the calculation.

 

Rolled up holiday pay.

This is deemed unlawful. The premise is that holiday is a health and safety provision so the emphasis is on employees/workers having a break not on them getting paid holiday pay per se.

 

Long term sickness

If an employee/worker is on long term sick then their holiday continues to accrue until they return to work or choose to take it. This then carries over year on year (subject to the 2 year rule above to claim unpaid accrued holiday – although it may also possibly be claimed as a disability discrimination reasonable adjustment but that’s a whole other story!).

 


So how is holiday pay to be calculated?

  • Statutory holiday pay is based on a week’s pay. If there is no set weeks’ pay then:
  • The calculation for annual leave is the average pay earned over a 12-week reference period. This applies to non-regular working patterns and shift patterns. This is over 12 paid weeks so if the person only works two weeks a month you go back for 12 paid weeks, in effect over 24 weeks in this example. If the person has only worked less than 12 weeks, for example 4 weeks, then its calculated based on those 4 weeks. This includes “allowances, overtime, travel time and commission now too!

Many contracts may refer to the employee/worker just getting basic pay for any holiday taken. This can only apply to any holiday over the first 20 days but that may well change. So…. If you give your employees/workers 5.6 weeks pay plus bank holidays you must pay the first 20 days as holiday with overtime (guaranteed and non guaranteed and commission and any travel time etc.) then the rest after the first 20 days can then be based on their contractual terms. However beware  – contract terms can be changed by custom and practice, so if you have always calculated it all on the higher basis you can’t just change it now!

If you have any questions on this or any other areas of HR or employment law please do not hesitate to contact our Natalie Roach on 01869 277692 or Natalie@oakemploymentsolicitors.co.uk