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Why holiday pay should be on your new year’s resolution list

If you have been meaning to deal with the issue of holiday pay recently, you should keep it at the top of your to-do list this year. John Lewis and Waitrose are two employers who have announced that they are setting aside millions of pounds to cover additional holiday pay liabilities for the year ahead.

The starting point: a week’s pay for a week’s leave

The law on holiday pay is complex, even though the general principle in the UK seems deceptively simple: that employees and workers (together referred to as ‘workers’ below) are entitled to holiday pay for annual leave, at the rate of a week’s pay for each week of leave.

But what counts as a week’s pay?

And what about workers with irregular weekly hours?

The new law: compulsory overtime, travelling allowances and time limits

The Employment Appeal Tribunal’s decision in the case of Bear Scotland Ltd v Fulton (heard towards the end of 2014) states that:

  • employers should give workers their “normal” pay for the purposes of holiday pay i.e. give them what they normally receive whilst at work. What is “normal” is easier to decide when workers have settled patterns of work. But when workers do not have ‘normal pay’, employers should use averages taken over a ‘reference period’. Whilst UK law uses a 12-working week reference period for calculating pay in other areas, the position here is still not clear. A longer reference period may be justified to avoid detriment to workers caused by seasonal peaks and troughs in the 12 weeks before a holiday.
  • non-guaranteed overtime (where the employee is obliged to work overtime if required, but the employer is not obliged to provide overtime) should be included in the calculation of holiday pay The issue of voluntary overtime is still undecided, though, so watch this space.
  • if a worker is paid an allowance for time spent travelling to work and this payment goes beyond actual travelling costs, the excess payment should be reflected in holiday pay. The time spent is linked to work and is not just a ‘cost’ paid purely due to where the worker lives.
  • workers claiming a “series” of underpayments of holiday pay will usually be out of time if the series is broken by a gap of three months.

New Government regulations have also imposed a 2 year cap on claims for back pay, for claims presented on or after 1 July 2015.

For guidance on how commission payments should also be reflected in holiday pay, please click on the link to read our update from June 2014 – Cost of holiday pay will increase as employees earn commission while on holiday.

What should employers do now?

  • Take overtime (and very likely any other payments intrinsically linked to the tasks which the employee is required to carry out) into consideration when calculating holiday pay.
  • Carry out an audit to ascertain the cost of adjusting holiday pay to include overtime but also the cost of potential claims from employees for historic back payments.
  • Review employment contracts to ensure the calculation of holiday pay is clear and up to date. 

For more information on this or any employment law issue, please contact a member of our employment team.

Posted on February 4, 2015

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