Holiday pay calculations: changes to be aware of
A number of recent court judgments need to be considered when calculating holiday pay and the rules employers and workers must follow to calculate holiday pay may need to be updated.
Below are some of the points your business may need to be aware of when calculating holiday pay:
Following a judgement in 2004 guaranteed overtime must be included with the calculation for holiday pay.
This means that where an employer is obliged by their own employment contract to offer and pay for agreed overtime this must be calculated when paying holiday pay.
On 4 November 2014 the Employment Appeal Tribunal made a ruling in the case of Bear Scotland v Fulton.
This covers how holiday pay should be calculated when non-guaranteed overtime is worked.
Non-guaranteed overtime is where there is no obligation by the employer to offer overtime, but if an offer is made then the worker is obliged under the terms of the contract to work overtime.
The judgment has clarified that:
- Workers should have normal non-guaranteed overtime taken into account when they are paid annual leave.
- Those making a claim must have had an underpayment for holiday pay, which has taken place within three months of lodging an employment tribunal claim.
- If the claim involves a series of underpayments, any claims for the earlier underpayments will fail if there has been a break of more than three months between those underpayments.
- Only the four weeks’ annual leave entitlement under the original Working Time Directive are covered by this judgment, rather than the full 5.6 weeks’ leave provided by the Regulations as they operate in Great Britain.
In situations where non-guaranteed overtime is carried out by workers on a regular or consistent basis, this ruling could have a significant impact.
However, it is unlikely to have an impact in situations where non-guaranteed overtime is either already factored into holiday pay, or possibly where this overtime is used on rare one-off occasions.
Limit on a claim for an underpayment
The introduction of The Deduction from Wages (Limitation) Regulations 2014 requires that when making a claim for backdated deductions from wages for holiday pay, a two year cap will be placed on all claims that are brought on or after 1 July 2015. Therefore the period that the claim can cover will be limited to a maximum of two years.
The question of voluntary overtime has not been directly considered by any recent judgments, so there is currently no definitive case law to suggest that voluntary overtime needs to be taken into account when calculating holiday pay.
Commission must be factored into holiday payments for the four weeks of statutory annual leave required under European law.
However, there is no requirement to do this for the additional 1.6 weeks of statutory annual leave provided under UK law.
This was confirmed in the case of Lock v British Gas Trading Ltd that was heard on 22 May 2014 by the European Court of Justice.
However, the Lock v British Gas Trading Ltd case has subsequently been referred back to the UK Employment Tribunal to consider how commission is calculated into holiday pay for that particular case.
A preliminary hearing in 2015 questioned whether the Working Time Regulations themselves could be read in line with the European judgment.
The tribunal’s ruling, which was also confirmed this year by the Employment Appeal Tribunal on 22 February 2016, said that it could be. However, this ruling may yet be subject to a further appeal.
At present, there is no definitive legal answer about how commission factors in to such holiday pay calculations, or how and if claims can be backdated.
On 4 November 2014 the Employment Appeal Tribunal issued a judgment in a case joined to Bear Scotland v Fulton, which considered how holiday pay should be calculated in relation to work-related travel.
It found that where payments are made for time spent travelling to and from work as part of a worker’s normal pay – these may need to be considered when a company is calculating holiday pay.
Holiday pay and sickness
When a worker takes paid or unpaid sick leave, their annual leave will continue to accrue. If a worker is unable to take their annual leave in their current leave year because of sickness, they should be allowed to carry that annual leave over until they are able to take it.
However, they may choose to specify a period where they are sick, but still wish to be paid annual leave at their usual annual leave rate.
Calculating holiday pay for different working patterns
No matter the working pattern, a worker should still receive holiday pay based on a ‘week’s normal remuneration’.
In most cases this means their weekly wage, but may include allowances or similar payments, such as commission.
- If a worker’s working hours do not vary, holiday pay would be a week’s normal remuneration.
- If a worker has no normal working hours then their holiday pay would still be a week’s normal remuneration, but the week’s pay is usually calculated by working out the average pay received over the previous 12 weeks in which they were paid.
- If a worker works shifts then a week’s holiday pay is usually calculated by working out the average number of hours worked in the previous 12 weeks at their average hourly rate.
Payment in lieu of holidays
The 5.6 weeks entitled to workers in employment as their statutory annual leave must be taken and cannot be ‘paid off’.
Anything above the statutory allowance may be paid in lieu, but this would depend on the terms of each business’s contract with an employee.
When a worker’s employment is terminated, all outstanding holiday pay that has been accrued but not taken – including the statutory allowance – must be paid.