Holiday pay – a hidden liability?

Since 2010, the Employment Tribunal has scrutinised the calculation of holiday pay in the UK. This is mainly because of the UK’s implementation of EU-derived legislation concerning holiday entitlement and pay. 

For example, in the case of salaried workers, UK holiday pay was calculated on the basis that workers receive basic salary only while on holiday. However, since 2010 claims have been made that a worker should be entitled to other pay components while on holiday, such as allowances and shift premiums, that would normally be earned if they were working. Subsequent claims were brought that a worker should be entitled to: 

  • a payment representing the commission they would normally have earned if they were working; and 
  • a payment in respect of any overtime they would normally have worked if they were not on holiday.  

These cases have led to the established legal principle that workers on annual leave should be paid their ‘normal remuneration’. What is normal will depend on the circumstances of each case, but shift allowances, premiums and commission should usually all be included. 

The overtime position is a little more complicated. There have been several cases seeking to clarify the legal position. These determined that both compulsory and non-guaranteed overtime should be included. However, a question mark remained over voluntary overtime. 

This was clarified in East of England Ambulance Trust v Flowers. The Court of Appeal held that voluntary overtime that is sufficiently regular and settled will form part of normal remuneration. The Trust appealed the decision to the Supreme Court but eventually settled, meaning the Court of Appeal’s decision stands.

April 2020 changes

In April 2020, the law changed on how holiday pay should be calculated for workers with irregular hours (such as casual or bank workers). Employers must now use a 52-week calculation period. This replaces the taking of the average pay over the previous 12 weeks in which work was undertaken and paid for.  

Some employers may have missed this change because of the coronavirus pandemic. It is important to check because employers who have not made this change could be underpaying holiday pay at times where casual workers didn’t undertake much work in the period before their holidays. 

What should private healthcare employers do? 

Employers may unknowingly be underpaying holiday pay as a result of recent legal cases and the April 2020 changes. If so, they are storing up a significant financial liability across their workforce. 
Employers should therefore review holiday pay procedures to see if action is required to mitigate this liability. 

Statutory enforcement of holiday pay is on the way

In June 2021, the government published its outcome to a consultation on basic working rights and confirmed that it will be introducing a single enforcement body (SEB). The body’s remit will include national minimum wage (NMW) and holiday pay. It has said that the enforcement regime will be like that used for the NMW.  

While no timeframe has been given to the SEB’s implementation, this is the clearest commitment yet from the government that it is coming. This is a further reason for employers to review their holiday pay procedures. 

Buyers and investors should be aware of hidden holiday pay costs

Those acquiring or investing in businesses should carry out their due diligence to establish whether there are any potential issues with the holiday pay calculation.  

Not only could these issues generate a historic liability that the buyer will inherit, but the additional holiday pay cost will need to be factored into the business’s running costs and therefore the price the buyer / investor is prepared to pay.

If you have any concerns about holiday pay applying to your private healthcare organisation, please contact Charlie Barnes or Suneel Gupta

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