Holiday pay - are you making an expensive mistake?

22 February 2019

On the face of it, holiday pay seems a fairly straight forward concept. A worker is entitled to be paid their normal pay whilst on holiday.

Unfortunately, it is not that simple and there are several areas where employers often get it wrong. 

State enforcement of holiday pay on the way

Getting it wrong is an issue because workers can bring claims in the employment tribunal and the county court against employers who fail to pay them the correct amount of holiday pay. 

The position will get worse because the Government announced in December 2018 that the state will soon be enforcing the payment of holiday pay for vulnerable workers. There is little detail on what the enforcement regime may look like but if the approach HMRC take to NMW enforcement is anything to go by, there will be little room for error. 

It is therefore crucial that employers grapple with the concepts now so that they aren’t storing up an expensive problem in the future. 

What should be taken into consideration when calculating holiday pay?

Originally, employers only needed to look at a worker’s basic pay when calculating their holiday pay. Commission or overtime payments were not taken into account. 

But in 2011, the European Court of Justice in Williams v British Airways, decided that holiday pay shouldn’t just be limited to basic pay. Instead, it must reflect what the ECJ called ‘normal remuneration’ – that is any payment linked to the performance of contractual duties. 

The later cases of Lock v British Gas and Fulton v Bear Scotland confirmed that holiday pay must also reflect commission earned, compulsory overtime and non-guaranteed overtime. 

Latterly, the Dudley Metropolitan Borough Council v Willetts case added more considerations to the list, including voluntary overtime worked on a regular and consistent basis, out of hours standby payments and call-out payments. 

What must be included?
Compulsory overtime (ie overtime the worker must contractually work)
Non-guaranteed overtime (overtime that’s not guaranteed but must be worked when asked)
Voluntary overtime (overtime the worker is under no obligation to accept) worked regularly
Shift Allowances
Acting up supplements
On-call allowances / payments
Out-of-hours standby payments
Mileage allowances treated as taxable benefits
What should you take a view on? Voluntary overtime that’s not worked regularly
Monthly and quarterly bonuses
Productivity, attendance, team, company and performance bonuses
Tips and gratuities paid via the payroll 
What doesn't need to be included? Expenses
Allowances to cover subsistence, accommodation and travel costs whilst away working

Does this affect the holiday pay you’ve previously paid?

Unfortunately, the decisions have retrospective effect meaning that workers can bring claims for historic underpaid holiday pay. These claims are limited to the past two years holiday and there are arguments which can be used to further reduce this timeframe. 

Can a worker carry forward any untaken holiday to the next leave year?

No, unless they were prevented from taking it due to sickness absence (see below). However, recent caselaw has indicated a worker can carry forward untaken accrued holiday if they were not reminded by their employer of their outstanding holiday entitlement before the leave year ended. 

Does a worker accrue holiday whilst off sick?

Yes. A worker cannot be required to take holiday whilst off sick but they are allowed to request holiday whilst off sick. If a worker cannot take their accrued holiday before the end of the leave year because of sickness absence, they are entitled to carry it forward to the next leave year. 

Are self-employed contractors entitled to holiday pay?

No, unless they satisfy the legal definition of a worker or employee. If the individual is wrongly categorised by the employer as self-employed, when in fact they are a worker, the employer is exposed to a financial liability for the unpaid holiday pay. This liability could become significant as the recent case of King v the Sash Window Workshop Limited indicates that if a worker was never given the right to take holiday in the first place (as would be the case for an individual treated as self-employed), their claim for unpaid holiday could go back to 1998 when holiday rights were first introduced.

Do these rules relate to all holiday workers are entitled to?

No. They only relate to the first 20 days’ holiday in each annual leave year (the amount of holiday required under EU law). They do not cover the extra eight days’ holiday the worker is entitled to under UK law. Nor does it cover any other holiday they’re entitled to under their employment contract (unless the contract says otherwise). 

Will the position change because of Brexit?

For the time being, no.  

What do you need to do now?

1. Review your holiday pay procedures.
What do you do about holiday pay when someone is off sick? Do you have an HR system or process in place which reminds workers of their outstanding holiday entitlement? 

2. Review your self-employed contractor arrangements.
Are they at risk of being deemed to be workers or employees and therefore entitled to holiday pay? 

3. Audit your payroll.
What payments are you making on top of basic pay, and which of these need to be considered when calculating holiday pay? You should also calculate what the financial exposure to historic claims of underpaid holiday pay might be and make a provision for that. 

4. Map your strategy.
How will you address the issue with staff to minimise the risk of a claim? What will you do about holiday pay calculations in the future? What will you do about historic underpayments? What should your communication look like and who do you need to communicate it to (Trade union reps, employee reps or the employees themselves?). Getting them onside at an early stage may help you limit any historic exposure and get agreement to your proposals on calculating holiday pay in the future. 

If you need any help concerning holiday entitlement or your holiday pay calculations please contact Charlie Barnes.