Adam Bernstein considers matters relating to holiday pay and entitlements
Employers often suffer from holiday pay headaches, confused about what to include or what reference period to use when calculating what is due. They are not alone as a raft of legal judgements has left many unsure of the correct position; mistakes can be very expensive to rectify.
Basic holiday rights
Before we go into the detail, Andrew Rayment, a partner in the employment team at law firm Walker Morris LLP says that it’s important to look at the key entitlements. “In essence,” he says, “workers are entitled to a minimum of 5.6 weeks paid annual leave (that’s 28 days for someone working five days a week); bank/public holidays can be included in this minimum entitlement. Of this 5.6-week entitlement, four weeks are granted by European law (known as Euroleave) and an additional 1.6 weeks are granted by the UK’s own Working Time Regulations 1998.”
He says that it shouldn’t be forgotten that part-timers are entitled to exactly the same level of holiday, but pro rata. For example, someone working four days a week gets 22.4 days leave. Further, workers start building up holiday entitlement as soon as they start work.
Employers can, within reason, control when workers take their holiday. But if a worker leaves their job, they should be paid for any holiday they’ve accrued but not taken.
But there is another consideration that Rayment points out here, and it’s one that trips up many employers. He says: “Employees continue to accrue paid holiday, as if they were at work, throughout maternity, paternity, adoption and shared parental leave (known as family leave).
Employees may choose to take this holiday before or at the end of the family leave period or a mixture of both.” He adds that employers may have to allow the employee to carry over (into the next leave year) more annual leave than is usually allowed to ensure that the employee does not lose any of the holiday accrued during the leave. He cautions employers that overtime, commission or bonus may need to be factored into the holiday pay accrued during family leave if it forms part of the employee’s normal pay.
Overtime, commission and holiday pay
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For most it’s a given that basic pay is used to work out holiday pay, but what about overtime? The answer to this question is, says Rayment, that “the calculation must use an employee’s ‘normal pay.’ So, if an employee normally works overtime, it should be included in the calculation of holiday pay.”
Contractual overtime is what an employer is contractually obliged to offer and that which employees are required to work; it must always be included in holiday pay. But as Rayment points out, “the Employment Appeal Tribunal (EAT) has made it clear that regular overtime that is not guaranteed, but that employees are expected to work if and when it is offered, must also be included.”
But what of voluntary overtime? On this Rayment notes a Court of Appeal decision which considered whether voluntary overtime must be included in the calculation of holiday pay. He says that “it was held that voluntary overtime must be included in holiday pay if it is ‘part of a pattern of work that is sufficiently regular and settled for payments made in respect of it to amount to normal remuneration’.” In simple terms, Rayment says that this means that while each tribunal will decide on the facts of each case, as a general rule of thumb, the more regular the voluntary overtime, the more likely it should be included in holiday pay.
Just as interesting, reckons Rayment, is the effect of commission on the calculation of holiday pay. In particular, he says that another Court of Appeal decision “made it clear that results-based commission should be taken into account when working out holiday pay.”
For those wanting to calculate holiday pay accurately, it shouldn’t be forgotten that the right to be paid overtime and commission in holiday pay stems from European case law and therefore applies only to the four weeks’ minimum annual leave provided under EU law, not to the additional 1.6 weeks provided for by the domestic Working Time Regulations 1998. This, says Rayment leaves “employers needing to decide how they will treat the additional 1.6 weeks’ statutory minimum leave; many have taken the view that it is preferable to simply include overtime in all holiday pay to avoid administrative confusion.”
Part-year workers
Most think of holiday pay and entitlements in terms of full and part time workers. But Rayment details a Court of Appeal case that challenged the traditional approach to calculating holiday pay for workers who only work for part of a year: “The case involved a visiting music teacher, engaged on a permanent (year-round) contract to work three terms in each year. The organisation calculated her earnings at the end of each term and paid the worker one-third of 12.07% of that figure (equivalent to 5.6 weeks). This payment method was recommended by ACAS guidance for calculating casual workers’ holiday pay.”
He continues: “The worker argued that this produced a lower figure than the calculation method set out by the Working Time Regulations 1998 and the Employment Rights Act 1996 which requires a worker’s holiday pay to be calculated as a ‘week’s pay’ for each week of leave. For workers who do not have normal working hours, a week’s pay is the worker’s average weekly pay in the 12 weeks before the first day of holiday, excluding any weeks in which no remuneration was payable.”
As Rayment highlights, the worker argued that there was nothing in the law requiring a different approach where, as in her case, a worker does not work a full year – and the Court of Appeal agreed. For those interested in this case, he says that “the Court of Appeal held that the Working Time Regulations requires only the straightforward exercise of identifying a week’s pay in accordance with the Employment Rights Act and the multiplying of that figure by 5.6.”
As an aside, it should be noted that 12-week reference period used in the case was increased to 52 weeks with effect from 6 April 2020.
Long-term sick leave
Employers shouldn’t lose sight of workers who have been unable to take their holiday because they’ve been on long-term sick leave. Of this Rayment says that they are entitled to “carry over four weeks’ unused holiday unless the employer allows more to be carried over.” He adds, however, that this holiday must be used within 18 months from the date it’s carried over.
Employees and their status
Another significant holiday pay decision that Rayment refers to was handed down by the Court of Appeal in February 2022 – the case of Smith v Pimlico Plumbers Ltd.
This decision means that workers who have taken holiday but not been paid for it will be able to carry over the right to payment from one leave year to the next. As Rayment highlights, “the decision has potentially far-reaching consequences for organisations who have failed to pay holiday pay to workers for any reason; as well as for organisations who might be quantifying back pay to correct any holiday pay underpayment.”
As background, Mr Smith worked for Pimlico Plumbers Limited from August 2005 until May 2011. Whilst working for the company, Smith was permitted to take holiday, but was not paid for it as Pimlico Plumbers said he was not a worker so was not entitled to paid annual leave. The company had originally classed Smith as an ‘independent worker.’
“Smith,” says Rayment, “was held to be a worker in the Supreme Court decision of Pimlico Plumbers Limited and another v Smith [2018]. This meant his holiday pay claim could proceed.”
Employers that breach the law
With the complexities of the law established, what penalties await employers that break the law? Rayment says it’s simple – “workers who believe they have been underpaid holiday pay can bring Employment Tribunal claims for back-payment,” adding: “where there has been a systemic failure to pay the correct amount for a whole workforce the potential exposure can be significant. The fact that the employer may not have realised they were underpaying is not a defence.”
However, notice should be taken of the Deduction from Wages (Limitation) Regulations 2014 which impose a two year back pay limit on deduction from wages claims. Even so, claims may be made without any real cost to the employee since the tribunal fees regime was struck down in the summer of 2017.
In summary
The law surrounding holiday entitlements is a quagmire for employer and employee alike. Firms ought to take good advice if in any doubt about their obligations and employees rights.
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