Holiday pay is a hot issue

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A case concerning voluntary overtime and a change to the employment rights regulations combine to give payroll professionals a headache when calculating holiday pay.

What is a week’s pay?

The Working Time Regulations (SI 1998/1833) give workers the right to a minimum of 5.6 weeks’ paid annual holiday, and this holiday pay is calculated based on two distinct elements:

  • regulation 13 provides for four weeks annual leave; and
  • regulation 13A for the additional 1.6 weeks UK holiday.

However, the definition of “week’s pay” can be different for these two portions of holiday pay.

Pay for the first four weeks reflects a series of cases decided both in the UK domestic courts and in the European Court of Justice. But pay for the remaining 1.6 weeks is calculated as determined by the worker’s (ie not just employees) contract of employment.

Basic pay

Until 2012, employers had taken the view that salaried staff had normal working hours and fixed pay, therefore only their basic pay needed to be paid while they were on holiday. Many employers had historically not even recorded when salaried staff were on holiday as no adjustment to pay was needed. Their basic pay was simply paid as normal during holiday periods.

The case British Airways plc v Williams & Ors [2012] UKSC 43 determined for the first time that other pay elements that were “intrinsically linked to the performance of the duties” had to be included in holiday pay. This ensured that the employee was not financially worse off whilst on holiday, which could act as a disincentive to take annual leave, so defeating the purpose of the EU Working Time Directive which is primarily a health and safety measure.

Since 2012, the UK courts have decided that all of the following must also be considered as “normal remuneration”: commission, attendance and productivity bonuses, travel-time allowances, payments related to professional or personal status (eg long service), guaranteed/contractual overtime, overtime that must be worked if requested by the employer, and even voluntary overtime.

Voluntary overtime

Bringing us back to the present day, the case of East of England Ambulance Service NHS Trust v Flowers and Ors [2019] EWCA Civ 947 centred on the definition of voluntary overtime. It considered whether this should be included within the definition of “normal remuneration” in the EU Working Time Directive (2003/88/EC) and the 1998 Working Time Regulations (2016 regulations in Northern Ireland).

This is the first time a holiday pay case has reached the Court of Appeal, but such were the financial implications for the NHS, the Ambulance Trust felt it was important to seek clarity.

The trust’s appeal was based on a distinction between different types of voluntary overtime: shift overruns and additional voluntary shifts.

The employer accepted that shift overruns (where the paramedics had to continue working if they were involved in an emergency call at the end of their shift) should be included in the calculation of holiday pay, but did not agree that where they had taken on additional shifts these should also be included.

The Court of Appeal was asked to consider both the paramedics’ contracts in respect to holiday pay and the requirement of the Working Time Directive (WTD).

The judge felt that both the contract and the WTD required all voluntary overtime to be included in holiday pay. Lord Justice Benn dismissed the appeal and ruled that there was no distinction in the two types of overtime and that as both could be paid on a “regular and settled” basis they should be treated as “normal remuneration”.

This reinforced the view taken in Dudley MBC v Willets [2018] ICR 31 where voluntary overtime undertaken once a month was considered to be regular enough to be included in holiday pay.

Average over a year

Once an employee has pay that varies, even just due to additional pay elements, the Employment Rights Act, s 222 says that their holiday pay is calculated based on the average pay over the 12-week period ending with the week immediately preceding the date on which their holiday begins. Note 12 weeks, not three months, as for monthly paid staff that would be 13 weeks!

From 6 April 2020, this 12-week averaging period will be extended (in Great Britain only) to 52 weeks as a result of the Employment Rights (Employment Particulars and Paid Annual Leave)(Amendment) Regulations 2018 (SI2018/1378).

The new regulations provide that if 52 weeks of continuous work haven’t been performed by the individual prior to the holiday week, the employer must go back over a maximum of 104 weeks to establish as many weeks’ pay as possible, even if this is less than 52.

Employers and agents may need to secure timesheet data back to April 2018 to meet the requirements of these new regulations.

You should also ask your payroll software provider what support they will be giving in these calculations of holiday pay from April 2020.

About Kate Upcraft

Kate is a technical writer, editor and lecturer on all aspects of employing people - primarily payroll and HR matters.

Replies

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By tom123
16th Jul 2019 15:41

So, every time an employee takes a day off, (say in the middle of a month I am about to pay) I have to have a mechanism for showing their previous 13 weeks pay?

What about if they take a day off in the first and third weeks of the month?

I get the idea, but just no idea how the mechanics of it could be done?

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to tom123
17th Jul 2019 14:54

tom123 wrote:

So, every time an employee takes a day off, (say in the middle of a month I am about to pay) I have to have a mechanism for showing their previous 13 weeks pay?

What about if they take a day off in the first and third weeks of the month?

I get the idea, but just no idea how the mechanics of it could be done?

Hi Tom123
I currently pass this link over to my clients for them to work out the holiday pay for those who work hourly. But as for the 52 weeks potentially turning into looking back 104 weeks, I doubt the software providers will program that into their system for us that far back as each year is a separate file. What a nightmare! Here is the link currently used.

https://www.gov.uk/calculate-your-holiday-entitlement

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17th Jul 2019 10:58

What happens if you have someone who is contracted to say 35 hours a week some times fall short of the 35 hours depending on work but sometimes work more hours
Do we have to average the 12 weeks hours and pay them the average number of hours? What if it is less than the 35 hours?

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to Confused78
17th Jul 2019 13:28

surely a 35 hour contract is just that - provide 15 hours work only, pay 35 hours - end of. Works 40 - what does the contract say for that - generally pro rata

thats why shift / rota planning becomes so necessary

holiday pay calcs are complex as the article implied. so works 15hours paid 35 - what is the 12.07% holiday entielement over the 12 previous weeks based on, hours presumably- or money paid ?

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By Tatumsa
17th Jul 2019 11:55

I have a part-time job, which is a flexi contract, So I only have 11 hours a week (over two days). However I usually get one or two days overitme (or overttime on my shorter shifts). When I take a week off from that job I use two days (pro rataed), and then no overtime. Would this affect me? It's paid overtime, so I don't know.

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17th Jul 2019 13:15

How will I calculate holiday if an employee worked for 12 weeks only. ie a new employee?

What about calculating holiday using 12.07% of the total hours worked during the holiday year or period?

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17th Jul 2019 14:09

When is this all going to end! Note it relates to the UK only yet alludes to being an EU directive? Employees are already compensated for overtime at 1 1/2 times etc.
No voluntary or scheduled overtime anymore for anyone! Then we will hear the squeals....

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By Tatumsa
to matabele
17th Jul 2019 14:22

My part-time job only pays 1.0x for overtime unless it's a Bank Holiday, then it's 1.25x. If only it was proper rates!

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to matabele
19th Jul 2019 08:44

A lot of employees are not paid at an enhanced rate of overtime. But the rate of pay for overtime is not the issue here. Imagine doing so much over time (for whatever reason), for so long that you adjust to your way of life and then whenever you take annual leave you see a drop in pay. This could cause breaches in WTD as people will be reluctant to take leave.

In terms of no overtime for anyone - would you want the paramedic that's in the middle of saving your life to reach the end of their shift...

I don't see them problem. Bit more tedious to calculate but that's it.

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18th Jul 2019 21:02

Whilst I see the complexities, in my industry of hospitality, we've been working on holiday accruing at 12.07% of pay (annual) for some time now. This is fully facilitated by Moneysoft Payroll, which works brilliantly for us.
The client keeps record of actual time off, to marry to the pay given.

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