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Holiday pay: 2014 update

On 04 November 2014, a ruling in relation to the calculation of holiday pay was given by the Employment Appeals Tribunal.

There is a plethora of information out there on holiday pay, most of which is confusingly either too legal and filled with jargon, or too dumbed down and misses the point.  This article explores what that means in practice and some practical tips for employers dealing with holiday pay calculation.

The 2014 Judgment on holiday pay

There have been a whole number of cases coming through dealing with holiday pay recently which have clarified a number of points:

  • A worker should not be put at a financial disadvantage when taking holiday or deterred from taking holiday due to a risk of financial disadvantage.
  • Workers should receive what would be their normal pay whilst they are on holiday.
    • Normal pay includes anything that is “intrinsically linked” to the performance of their role.
    • Normal pay, therefore, includes the following:
      • Compulsory over-time (including even where that overtime is not guaranteed)
      • Commission linked to the worker’s normal role and certain shift bonuses/attendance bonuses etc.
    • The key as to whether such payments should be included in the holiday pay calculation is whether it occurs with enough frequency to be said to be normally included as a part of that workers pay.
    • This obviously won’t apply to salaried members of staff who only receive a salary or those who also have the option of voluntary overtime.  Contrary to some media reports this case does not apply to voluntary overtime.
  • Workers can bring claims for underpaid holiday pay going back in time, at most up to the date when the Working Time Regulations 1998 came into force.  Any claim would have to be brought to the Employment Tribunal within three months of the last deduction (i.e. the last underpayment of holiday pay).
    • They can claim for a series of deductions provided there is not more than three months in between one underpayment and the next.
    • A break of three months or more will break the chain meaning that worker cannot claim for any older underpayments.
    • If there is no three-month break, the worst case scenario is that they would make a claim right back to 1998.  However, it is highly unlikely that an employee will have that long without a three-month break between holidays.
    • This means that the length a worker can claim will depend entirely on their personal circumstances.

The above only applies strictly speaking to the four weeks holiday entitlement granted from Europe (the 20 days full-time equivalent).  The additional 1.6 weeks given to workers in England and Wales (i.e. the 8 normal bank holidays) do not, strictly speaking, need to be paid in this way.

It is worth noting that the Employment Appeals Tribunal has given leave to appeal this case to the Court of Appeal….so watch this space!  But for now at least the above is good law.

What does this mean?

This update opens the door to many workers for quite chunky claims for underpayment of holiday pay.

It also means that employers will need to carefully assess how they pay holiday pay currently and make any required changes as soon as possible to avoid getting further stung by potential back pay claims.  This could mean significant additional costs having to be paid out by employers each year.

Considerations when calculating holiday pay

The main points to consider are that each worker’s circumstances will be different.  In order to calculate what they may be entitled we would suggest the following:

  • For each category of employee work through them to assess what payments make up their “normal pay”.
  • Contrast the position above with what you pay them for their holidays.  If this is the same or more, then these workers won’t have any value to their claim.
  • For those whose position at point 1 is more than they have actually been paid historically, they may have a claim.
  • For those employees who may have a claim, you will then need to look at their individual circumstances and see whether there are any three-month gaps that break the chain in their claim.  This will give you the length of their claim.
  • Then you can make the calculation to “top” up the holiday pay that each worker perhaps ought to have received (remember this is only for the 20 days a year).

Once you have calculated what those workers should have been paid, what do you do next?

Our advice to employers is that (broadly speaking) they have the following options:

  • Do nothing.  The risks involved with this are apparent and most obviously the risk of a claim for underpaid historical back pay.
  • Rectify the situation going forward but do nothing about the historical position.  By trying to sell the increased holiday pay as a “good news” story you may not face any claims for historical pay.  However, the significant media coverage of this may hinder this plan.
  • Talk openly and honestly to workers or their representatives (whether unions or elected representatives) about the situation and seek to come to an arrangement to protect you from historical claims.  This may involve a settlement agreement to settle historical claims and rectifying the situation going forward.  This may or may not involve negotiation of a lump sum to be paid to the affected workers.  It will depend on what you can negotiate.
  • Consider alternatives going forward – could you use agency workers or bank staff to cover overtime?  Would this decrease your bill for holiday pay?
  • Consider moving workers over to salaried contracts.  This, of course, would mean a business reorganisation and changing workers’ contracts of employment.

Whatever way you look at it, it would seem that this decision will have a profound impact on employers going forward.  It is unlikely that we have heard the last of this topic with permission being granted to appeal and the Government has already set up a task force to review the impact of this ruling.

Whilst this may affect you, pragmatic steps can be taken to minimise this impact, or at least ensure you as a business is in control of it.

For more information, please contact our Employment & HR team on 01332 340 211.

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