Holiday Pay – getting it right

The ever developing rules surrounding holiday pay leave many HR professionals and business owners confused about how to calculate holiday pay and the consequences of getting it wrong.

The Government’s “Good Work Plan” launched on 17 December 2018 proposed various reforms in relation to holiday rights which has made it increasingly important for employers to approach holiday pay in the correct way.

In the absence of hard and fast rules, commonly employers find it difficult to know which types of payments are likely to be regarded as part of a worker’s “normal remuneration” for the purpose of calculating holiday pay and on what basis holiday pay should be calculated.

What is normal remuneration?

We are often asked whether certain payments paid to employees should be considered as “normal remuneration” for the purposes of calculating holiday pay. In short, payments made to an employee over a period of time with sufficient regularity will be considered “normal remuneration”. A good practical example is payments made for overtime worked.

There have been a number of case law developments this year regarding holiday pay, particularly regarding whether overtime is normal remuneration.  In East of England Ambulance Service NHS Trust v Flowers the Court of Appeal held that regular voluntary overtime must be included in the calculation of holiday pay, despite there being no contractual entitlement to work overtime.  As a result employers should consider whether voluntary overtime meets the test of being sufficiently regular and predictable for it to be considered “normal remuneration” for the purposes of calculating holiday pay.

In summary, the following types of payment, if paid on a regular basis over a sufficient period, are likely to be regarded as part of the worker’s normal remuneration:

Overtime pay (whether compulsory or voluntary, guaranteed or non-guaranteed)
Commission payments
Bonus payment and other incentive payments
Productivity or performance bonuses
Payments that relate to the personal and professional status of workers such as those based on seniority, length of service or professional qualifications
Shift allowances and premiums
Standby payments and payments for emergency call-out duties
Travel and allowances that are treated as taxable remuneration
Any other regular payments

Issues relating to the calculation of holiday pay

Another issue which has been in the Courts over the summer is how employers should calculate holiday for part-year workers.  Under the Working Time Regulations 1998 (WTR) workers are entitled to a minimum of 5.6 weeks’ paid holiday per year.  This translates to 12.07% of holiday for full-time workers in relation to their working year.

In Harpur Trust v Brazel a visiting music teacher was employed on a permanent, zero-hours contract and only worked during term time. Mrs Brazel was required to take all her holiday in the school holidays and was paid an amount in respect of holiday pay at the end of each term.

There were two potential methods for calculating her holiday pay in these circumstances:

A weeks’ pay should be calculated based on the employee’s average weekly remuneration in the previous twelve weeks (Section 224 ERA 1996).
Her total holiday pay should be 12.07% of her total pay over a year.

Clearly the first method of calculating holiday pay is more beneficial to the employee as she would have been paid a salary in the previous 12 weeks of term time. Holiday pay calculated in this way equated to around 17.5% of her average earnings. However, the Harpur Trust argued that her holiday pay should be capped at 12.07% in accordance with the entitlement of full-time workers.

The Court of Appeal upheld the decision of the Employment Appeal Tribunal that while part-time workers should not be treated less favourably than full-time workers as a matter of law, there was no opposite principle that treatment of part-time workers must not be more favourable. Further, the Court of Appeal held there was no requirement in the WTR to pro-rate holiday entitlement for part-year workers. Employers must simply identify a weeks’ pay (in this case over the 12 weeks’ term-time reference period) and multiply that figure by 5.6.

Consequences of getting it wrong

Workers can bring claims in the employment tribunal for any shortfall in holiday pay (usually for a backdated period of two years) and the value of such a claim can be surprisingly costly for employers. However, once employers start paying holiday at the correct rate, usually workers will only have 3 months to lodge their claim.