Maaz Naeem ACIPP, policy and research officer at the CIPP discusses the nuances of holiday entitlement and pay, and considers the extra bank holiday in 2022, along with some recent case law payroll professionals should be aware of
Everybody knows that employers must legally provide paid annual leave. Like any non-compliance, it can be costly to organisations and clients and cause serious reputational damage if holiday pay and entitlement isn’t treated correctly. Incorrect calculation methods for holiday pay are often applied to all employees, and there’s the danger they’re used over a prolonged period before the issue is identified, and subsequently, resolved.
What does the legislation say?
The simplest principle of holiday entitlement, as laid out by the Working Time Regulations 1998, is that all employees are entitled to the equivalent of 5.6 weeks’ paid holiday every year, or 28 days, whichever is less. The amount they’re paid during that time off is determined by their normal pay and working pattern. The aim is for them to receive the pay they’d have ordinarily received if they’d been working. This is frequently referred to as normal remuneration.
Entitlement to annual leave continued to build during periods of furlough and will continue during any periods of statutory leave, such as sickness or parental leave. Employees also have the right to take any holiday pay they’re owed during periods of sick leave. In such cases, they would be paid holiday pay instead of statutory sick pay for the days taken as holiday. Employers may choose to pay above the statutory holiday entitlement, and this is referred to as contractual holiday pay.
Bank holidays and the Queen’s Platinum Jubilee
Bank holidays can count towards holiday entitlement, but this isn’t a legal requirement. The contract of employment determines whether employees and workers are entitled to bank holidays off or not. For part-time workers who are contractually entitled to bank holidays off, the entitlement only extends to days they would have ordinarily worked. The safest alternative approach is to pro-rata the bank holidays and add them to the entitlement.
In 2022, there’ll be an extra bank holiday in June to celebrate the Queen’s Platinum Jubilee. The May bank holiday will be moved to Thursday 2 June and an additional bank holiday added on Friday 3 June, to make a four-day weekend. Strictly speaking, there’s no legal obligation for employers to provide an extra day off, or to add this to holiday entitlement. The wording in the contract is essential here, as phrases such as ‘20 days plus bank holidays’ would indicate that the extra bank holiday this year must be added to the entitlement.
How is holiday pay calculated?
The GOV.UK website provides a tool to help in the calculation of holiday entitlement. This can be found at: http://ow.ly/mRuj30sgPOH.
The method for calculating an employee’s holiday pay is based on their working pattern.
Although lots of the UK workforce have fixed hours and receive a set salary at the end of each pay period, things get more complicated when workers don’t have a regular working schedule or fixed pay. There are different calculation methods for different scenarios, but the data used to calculate average pay or average hours is based on the reference period.
As of April 2020, the reference period is the last 52 weeks in which a worker has received pay. The maximum period in which to find 52 paid weeks spans over the previous 104 weeks, so anything prior to this won’t be used in the calculation. If the employment is less than 52 weeks, then the total number of weeks worked will make up the relevant period, and the calculation will be adjusted accordingly.
The policy team is currently creating a holiday pay factsheet available to members which will give them an explanation of the various calculation methods. For more in-depth support, there’s also the option of booking onto one of the CIPP’s holiday entitlement and pay training courses, at: http://ow.ly/Z7jy30sgPQx.
Relevant cases and judgements
There are several cases that highlight instances where employers and businesses have failed to apply legislation relating to holiday entitlement and pay correctly.
Harpur Trust v Brazel
The case of Brazel v The Harpur Trust highlights the importance of using the calculation methods prescribed by legislation. Mrs Brazel was a part-time music teacher who worked predominantly during term-time. As per her statutory right, she was entitled to 5.6 weeks of paid holiday. The employer calculated her holiday entitlement using the ‘12.07% approach’.
The 12.07% approach, although never prescribed by legislation, seems to be commonplace, but it is problematic. The standard calculation pays 12.07% of hours worked in a set reference period, with the payment made when the employee takes holiday. In some scenarios, it can lead to a significant underpayment of holiday.
Legislation aims to ensure that part-time workers are entitled to 5.6 weeks paid holiday. Someone who works fewer weeks in a year and has irregular hours is disadvantaged by the 12.07% calculation method, but the method of using the 52-week reference period removes this disparity. As a result, Mrs Brazel won her case at the Court of Appeal, and the employer was ordered to renumerate her accordingly. The employer has since appealed to the Supreme Court and the judgement is expected imminently.
Employment status and holiday pay: worker or self-employed?
This question has been raised in several notable cases in recent years. In the case of Uber BV v Aslam, drivers for the famous rideshare company, Uber, demanded the right to holiday pay. Although they were self-employed for tax purposes, the question was raised as to whether their relationship with Uber qualified them for statutory employment rights. Uber claimed the drivers weren’t working for them, and they were merely providing technology to connect them to customers.
The court ruled that drivers were indeed workers for Uber, based on the dependency and subordination in the relationship. For example:
Uber dictated the terms of the contract and drivers had no say in them
Uber set the fare, so could dictate how much drivers earned
requests for rides were constrained and drivers could be penalised for rejecting too many rides
Uber had the capacity to place temporary bans on the relationship if drivers had bad ratings or complaints made against them
the drivers had no right to substitution, and they had to personally complete the jobs they accepted.
Despite Uber’s initial appeals, the case resulted in confirmation of the drivers’ entitlement to holiday pay and other worker rights.
The case of Addison Lee v Lange was almost identical. It was ruled that drivers for the car and courier company, Addison Lee, were also workers for the purposes of the Employment Rights Act 1996. The company’s request to appeal the verdict from the employment appeal tribunal was rejected by the Court of Appeal.
Deliveroo is another well-known organisation, which faced a similar legal battle. Deliveroo provides a delivery service in which it connects drivers to takeaways and customers. This time, multiple rulings upheld that its riders couldn’t be classed as workers. A key difference between this case and those mentioned above centres on the right to substitution – sending another person to carry out jobs on their behalf.
A note of caution…
The CIPP’s policy and Advisory Service teams, unsurprisingly, receive many questions regarding holiday entitlement and pay.
Two issues seem to frequently crop up, which relate to:
‘rolled up’ holiday pay – this involves the practice of paying employees an increased hourly rate of pay, to account for any holiday pay. Legislation in this area clearly states this isn’t a legal practice, as holiday pay should be paid when annual leave is taken, over the course of the year
the reference period for holiday pay calculations – as previously discussed, payroll teams should ensure that, from 6 April 2020, they use a 52-week pay reference period for holiday pay calculations. Some organisations appear to continue to use the previous 12-week reference period calculation, but this means they aren’t complying with holiday pay legislation.
What the future holds
Organisations should ensure they’re compliant and paying staff correctly, and holiday pay is no exception to this rule. With the introduction of the single enforcement body, which will, among other things, focus on the enforcement of holiday pay, payroll professionals should check that calculations regarding both entitlement and payment for holidays within their businesses are correct. Could the department for Business, Energy and Industrial Strategy introduce a ’name and shame’ list for holiday pay, much like it currently does for organisations that fail to pay staff the national minimum wage? Only time will tell…