While the right to 5.6 weeks (or 28 days for a full time worker) paid holidays was a welcome addition to workers’ rights, many employers have been left confused and less enthusiastic about the complicated development of the rules, particularly if staff work irregular hours or their pay packets include commission or bonus payments.

With the law being so hard to navigate, it is easy to unwittingly miscalculate holiday pay or to wrongly deny workers the right to carry forward holiday. This can leave employers exposed to an employment tribunal claim for back pay. Richard Porter, employment law expert with Thompson Smith and Puxon in Colchester and Clacton, summarises how to work out holiday pay, when workers can carry forward holiday and how to manage rolled-up holiday pay. He also takes a look at how things may change in the future.

Calculating holiday pay

Calculating a week’s or month’s pay is straightforward for workers who work fixed hours and only ever receive a basic wage or salary; annual pay is divided by 52 or 12.

However, for workers who get additional payments on top of their basic pay, the first step is to determine whether one is calculating pay for the first 4 weeks (or 20 days) of paid leave (which arise from a European directive), the further 1.6 weeks (or 8 days, equal to the number of bank holidays in a normal year which arise under UK law) or any more days which may be granted by the employer pursuant to the employment contract. Different rules apply to each!

For contractual holidays over and above the 5.6 week minimum companies can determine their own rules and conditions. Make sure they are set out clearly in a contract or a policy.

The first 4 weeks should include all payments a worker would normally receive. These can include commission, overtime, most bonuses and allowances such as for shift working.

Only those payments which are considered ‘normal remuneration’ are payable. We can review payment patterns to advise on which payments, and what proportion of a payment, should be included to avoid underpaying staff when they take holiday.

Different rules apply to calculating a week’s pay for the remaining 1.6 weeks holiday. This involves taking an average over the previous 12 weeks. Additional payments may be included, but will depend on whether the workers work normal hours or not and whether pay varies according to the times worked or the amount of work done. Again, we can review the working patterns to apply the right rules for the holiday payments.

Do workers have to use up all their holiday in one year?

Workers should take the four weeks holiday provided by the European legislation during the leave year. This is considered to be a Health and Safety provision and employers should ensure that this is done whenever possible. But if the employee is unable to take holiday because they are on sick leave or maternity leave for example, they must be allowed to carry their entitlement to four weeks holiday (or what is left of their entitlement to the European element) forward into the next leave year. Employees who are long-term sick leave should be able to carry forward holiday for up to 18 months from the end of the leave year.

A word of warning, though: a worker may be able to carry forward holiday for years where the reason for not getting paid holiday was that the employer failed to enable the worker to take his or her holiday entitlement. A recent ECJ case suggests that “enable” means “encourage”. These large claims may also arise where the employer mistakenly treated the worker as a self-employed contractor with no right to paid holidays. The worker may then be able to recover significant back payments.

No more rolling up holiday pay

Because of the difficulties in working out holiday entitlement, particularly for casual workers, it was common practice for employers to add an enhancement to the hourly rate instead of giving paid time off work. This was known as ‘rolling up’ holiday pay. This is now unlawful. The practice is best avoided because if the worker brought a claim for holiday pay, there is no guarantee that an employment tribunal would take the rolled-up pay into account.

Instead, payroll software packages are available that will calculate holiday entitlement for workers with irregular hours. Alternatively, the government’s holiday ready reckoner tool is helpful.

The future for holiday pay

The rules for calculating holiday pay for workers with irregular hours will change from 6 April 2020. A week’s pay will be averaged out over the previous 52 weeks, instead of 12 weeks to take account of seasonal variations. The government has also announced that the state will be responsible for ensuring that certain workers receive their proper holiday entitlement. No date has been set for this yet.

As the number of claims to employment tribunals is rising and workers’ rights are increasingly in the news, now is the time to ensure you are paying the right holiday pay and allowing carry forward where appropriate.

For a review of your policies and practices, and help with rights relating to holiday or another employment matter, please contact Richard Porter at TSP Solicitors on 01206 574431 or email info@tsplegal.com