Holiday pay calculations
01 April 2019
This article was featured in the April 2019 issue of the magazine.
Danny Done, managing director at Portfolio Payroll, replies to a question about holiday pay
“I have a varied workforce which includes full-time and part-time staff as well as those on zero-hours contracts. What do I need to know when it comes to working out holiday pay?”
Keeping on top of holiday pay can be tricky, especially if your workforce is made up of staff with different working patterns and employment relationships. This will often require a coordinated effort between human resources (HR) and payroll departments to ensure a variety of aspects are correctly accounted for.
In traditional working relationships, where individuals work fixed hours, you should pay them in line with their normal weekly rate for each week of annual leave. Under the Working Time Regulations 1998 the calculation for holiday pay, which applies for both full- and part-time staff, should be based on normal working hours and exclude overtime unless is it is compulsory.
With this being said, there is prevailing case law which indicates that non-guaranteed overtime should also be factored into holiday pay under certain circumstances. The case of Bear Scotland v Fulton in 2014 states that non-guaranteed overtime should be included when it is ‘normal’. Whilst there is no legally binding definition of how often non-guaranteed overtime would have to occur to be considered normal, the court has given guidance that once every five weeks would, in their opinion, qualify as normal.
In line with Bear Scotland therefore, when calculating holiday pay you should review the previous twelve weeks’ employment to give an accurate reflection of the amount of time worked, taking the average amount of total pay received, including any non-guaranteed overtime, and include in any holiday pay. It is also important to note that such overtime payments only apply to four of the 5.6 weeks of an employee’s statutory annual holiday entitlement, as this is the minimum required by European law. Any additional holiday does not need to include overtime.
You should also consider where employees earn commission as part of their job as there is similar case law which requires this to be included within holiday pay under certain circumstances. The case of Lock v British Gas Trading, from 2015, ruled that staff who are paid commission based on individual results must have this factored into their holiday pay. Again, this additional pay only needs to be included in 4 of an employee’s 5.6 weeks of statutory annual leave each year.
...holiday pay calculations will be extended to a 52-week reference period
As you also have zero-hours staff on your payroll it is important to understand the difference when calculating their holiday pay. The calculations for staff who work irregular hours, or whose pay varies from week to week, must be based on their overall average weekly remuneration during the previous twelve-week period. If during this period, there is a week in which zero-hours staff were not required to complete any work the calculation must take into account an earlier week in which they worked.
Having said this, it should be noted that from 6 April 2020, the twelve-week period for holiday pay calculations will be extended to a 52-week reference period. This extension has been announced as part of the government’s Good Work Plan and is intended to ensure a fairer approach for staff when it comes to calculating holiday pay for those with flexible working hours, including zero-hours staff. Although this will not be introduced for over a year you should make sure to keep accurate records of working time for staff going forwards in order to make accurate calculations of pay for the previous 52-week period.
It is important that you keep on top of these requirements as a failure to issue the correct amount of holiday pay could result in tribunal proceedings. Staff who are unlawfully underpaid will be able to make a claim for unlawful deduction of wages, which if successful would legally require you to issue any outstanding payments as a lump sum.
Therefore, to ensure you issue staff with the correct holiday pay you are advised to keep track of working hours and pay using a clear and reliable reporting method. For this reason, many employers favour an electronic clocking-in system over the use of a paper sign-in sheet which can be prone to error and manipulation.
It is ultimately important that staff receive the correct amount of holiday pay, as this is designed to encourage them to take annual leave and ensure they suffer no financial detriment as a result. With this in mind, you are advised to review your existing contracts and businesses practices with regards to overtime and commission to ensure they remain compliant with current legislation.