Holidays and holiday pay: What employers need to know

While the right to 28 days’ paid holiday was a welcome addition to workers’ rights, employers have been less enthusiastic about the complicated development of the rules, particularly if staff work irregular hours or their pay packets include commission or bonus payments.

With the law being so hard to navigate, it is easy to unwittingly miscalculate holiday pay or to wrongly deny your employees the right to carry forward holiday. This could leave you exposed to an employment tribunal claim for back pay. Emma Thompson, employment law expert with Thackray Williams, summarises how to work out holiday pay, when workers can carry forward holiday and how to manage rolled-up holiday pay. She also takes a look at how things may change in the future.

Calculating holiday pay

Calculating a week’s or month’s pay is straightforward for workers who work fixed hours and only ever receive a basic wage or salary; annual pay is divided by 52 or 12.

However, for workers who get additional payments on top of their basic pay, the first step is to determine if you are calculating pay for the first 20 days of paid leave (which arise from a European directive) or the further 8 days (arising under UK law). Different rules apply. If you give workers any more holiday than 28 days, you can determine the rules for those days. Make sure you set them out clearly in the contract or a policy.

For the first 20 days’ holiday, you should include payments that you pay the worker repeatedly or on a regular basis. These can include commission, overtime, most bonuses and allowances such as for shift working.

Only those payments which are considered ‘normal remuneration’ are payable. We can review payment patterns to advise you on which payments and what proportion of a payment you should include so that you can avoid underpaying staff when they take holiday.

Different rules apply to calculating a week’s pay for the remaining eight days’ holiday. This involves taking an average over the previous 12 weeks. You may have to include additional payments, but this will depend on whether the workers work normal hours or not and whether pay varies according to the times worked or the amount of work done. Again, we can review the working patterns to apply the right rules for the holiday payments.

Do workers have to use up all their holiday in one year?

Workers must take four weeks’ holiday during the leave year. Employers should ensure that this is possible. But if the employee is unable to take off four weeks because they are on sick leave, the employee can carry their holiday entitlement forward into the next leave year. If they are on long-term sick leave they can keep carrying forward holiday for up to 18 months from the end of the leave year.

A word of warning, though: a worker may be able to carry forward holiday for years where the reason for not getting paid holiday was that the employer mistakenly treated the worker as a self-employed contractor with no right to paid holidays. The worker may then be able to recover significant back payments.

Employees on family-related leave (maternity, adoption and shared parental leave) also have the right to carry forward holiday.

No more rolling up holiday pay

Because of the difficulties in working out holiday entitlement, particularly for casual workers, it was common practice for employers to add an enhancement to the hourly rate instead of giving paid time off work. This was known as rolling up holiday pay. This is now unlawful. The practice is best avoided because if the worker brought a claim for holiday pay against you, there is no guarantee that an employment tribunal would take the rolled-up pay into account.

Instead, payroll software packages are available that will calculate holiday entitlement for workers with irregular hours. Alternatively, the government’s holiday ready reckoner tool is helpful. You can then let the worker know about holiday as they accrue it.

The future for holiday pay

The rules for calculating holiday pay for workers with irregular hours will change from 6 April 2020. A week’s pay will be averaged out over the previous 52 weeks, instead of 12 weeks to take account of seasonal variations. The government has also announced that the state will be responsible for ensuring that certain workers receive their proper holiday entitlement. No date has been set for this yet.

As the numbers of claims to employment tribunals are rising and workers’ rights are increasingly in the news, now is the time to ensure you are paying the right holiday pay and allowing carry forward where appropriate.