It is that time of year again when employees wish to jet off on their summer holidays to lands far and wide. They will have their out-of-office on, passports ready and suitcases packed. But do you as their employer fully understand an employee’s rights when it comes to their annual leave?
There seems to be a lot of information on this topic, it can be very confusing, and at times hard to understand. Recently there have been a few high profile cases regarding employees statutory holiday entitlement. It is important that, as an employer, you are aware of these changes so you know how to comply.
Here we will set out the basics and cover the key legal pointers on holidays so you know your rights and responsibilities as an employer.
The right to annual leave in the UK is found in the Working Time Regulations 1998 (WTR).
This provides that a full-time employee is entitled to 5.6 weeks’ annual leave (28 days) in each leave year. This is made up of:
- The right under an EU Directive to a minimum of four weeks’ annual leave (20 days) each year; and
- The UK right to an additional by 1.6 weeks’ annual leave (8 days) each year which represent the number of bank holidays in a year in England & Wales, but need not be used for them.
A part-time worker is entitled to 28 days’ holiday reduced pro rata, according to the number of days/hours they work each week. An employee is entitled to the right to holiday leave from their very first day of employment; no minimum service is required.
Holiday entitlement & pay in lieu of notice
Quite often employers dismiss employees without notice but instead offer the employee pay in lieu of notice equivalent to their salary during their notice period. The date of termination is the employee’s last day in work.
In such instances, holiday pay under the WTR is calculated up to the date of termination. There is no right to accrue holiday (or to receive a payment in lieu of holidays that would have accrued) during what would otherwise have been the notice period.
This can be contrasted with when an employee works their notice period. They would still be entitled to accrue holiday during their notice period, until the date of termination, at the end of their notice period.
Carrying over holiday
The basic position in the WTR is that the minimum four weeks’ leave (20 days) entitlement must be taken in the leave year to which it relates, or else it is lost. “Use it or lose it!!”
The “additional” 1.6 weeks’ leave (8 days) may be carried forward into the next leave year where it has been contractually agreed between employee and employer. In the absence of an express provision in the contract to carry over, it is not allowed.
Sometimes employers offer their employees enhanced holiday entitlement, over and above the minimum in the WTR. It is not possible to attempt to agree a lower entitlement than the 5.6 weeks in the WTR. That is the “statutory minimum”.
In relation to carry over of any additional contractual holidays over and above the “statutory minimum”, you should ensure you deal with this expressly in the contract. Carry over of contractual holiday is permitted by law, and so you should decide whether or not you want to allow this and ensure your contracts are clear on this point.
What happens to annual leave when an employee is prevented from taking it due to periods of sick leave, maternity leave or other family-related leave?
There have been lots of cases on this point recently, and in certain respects, the decisions in these cases are out of step with the wording under the WTR.
However, recent case law suggests that employees who have been absent from work due to maternity, paternity, adoption or long-term sickness absence can carry over unused statutory holiday (this includes the basic four-weeks and the additional 1.6 weeks entitlement) into the next leave year. This means holiday entitlement can roll over automatically in these circumstances.
It is not 100% clear how many holiday years unused holidays can roll over for…we await guidance. However, indications are possibly up to 2 – 3 holiday years.
Holiday pay to include overtime/commission
In general, employees are entitled to be paid their basic salary without any additional bonuses or commission payments, whilst on annual leave. This is the case with most “salaried” employees.
If however, an employee’s normal working hours vary according to the amount of work done (i.e. a piece of work), or the time of work (i.e. shift patterns) they are entitled to holiday pay based on their average pay during their working hours over the previous 12 working weeks. This includes any commission or similar payment which varies in amount, and any guaranteed (or obligatory) overtime.
As an employer trying to determine whether to include commission and bonus payments when calculating holiday pay, it is worth considering these key questions:
- Does the employee have normal working hours? If the answer is no, the bonus or commission will always be taken into account.
- Assuming that the employee has normal working hours, does the payment in question form part of the employee’s entitlement for working those hours, or is it something extra? If it counts as pay for normal working hours, it must be taken into account.
- If the employee has normal working hours and the payment is not part of his entitlement for those hours, can it be said that the pay varies according to the amount of work done? If pay varies according to some criterion other than the amount of work done, the payment will not be taken into account.
However, employers should beware that there have been recent case law that goes against the principle at point 3 above. In this most recent case, it was determined that where an employee’s remuneration includes contractual commission, determined with reference to sales achieved, the contractual commission should be included in the calculation of statutory holiday pay.
Holidays are a complex area. This guide should help clarify some issues and common myths to give you a clear picture of what you should and shouldn’t be doing.
It is an opportune time now to ensure your business is compliant with the law. What can you do as the employer?
- Review how your employees are actually paid for holidays
- Review how your employees should be paid (with reference to this guide) – should you be paying your employees holiday pay that includes any payments for overtime, commission or bonuses? Seek legal guidance if you are unsure.
- Review your contracts of employment – Is the holiday entitlement clause correct? Are there provisions in there to deal with employees’ entitlement to carry over holiday into the next leave year? Are there any provisions in there to deal with holidays in instances such as sick leave, maternity, paternity or adoption?
- Check your employee handbook and/or holiday policies – are these policies up-to-date and accurate?
- Check that your payroll department are paying your employees in line with their correct holiday entitlements – If not, then correct this position immediately. You don’t want to risk incorrect holiday pay as this can give rise to claims at the Employment Tribunal for unpaid holiday, which could go right back to 1998 when the WTR were implemented.