Posted by jonathanfullarton - November 7, 2022 2:02 pm Holiday Pay and Entitlement Guidance

Holiday Pay and Entitlement Guidance

By Tina Smitherman MCIPPDip & Debbie Wilson ACIPP at MFW Sittingbourne

Holiday pay and entitlement has come under a lot scrutiny in recent years and following a number of tribunal cases, guidance is continually being updated and amended to reflect the outcomes of these cases. As such, we have put together this blog to explain how holiday entitlement and holiday pay should currently be treated.

As many employers are now aware, the 12.07% for holiday accrual and pay is now unlawful in the EU and therefore no longer a recommended practice in the UK. Any type of rolled up holiday pay added to a usual worker’s pay each pay period should no longer be processed. So, how do you calculate holiday accrual and pay and when should it be paid? 

Holiday entitlement and accrual

All workers are entitled to a minimum of 5.6 weeks paid annual leave in each full holiday year. This can only be pro-rata’d in a year where the worker starts or leaves employment. A part time worker, working less than a full week is still entitled to 5.6 weeks paid annual leave.

The 5.6 weeks is made up of 4 weeks from EU Working time Directive (regulation 13) and an extra 1.6 weeks UK law to cover the 8 days bank holidays that we are given by our government each year (regulation 13A).

Employment contracts may offer more paid annual leave than the above but for the purpose of this blog we will assume the minimum 5.6 weeks given.

Holiday Pay

When a worker takes holiday they must not be financially penalised for doing so. Therefore, their pay whilst they are on holiday, must not be less than they would normally expect to earn for that time off.

Salaried workers

Where a worker is contracted to work the same number of hours every week and pay does not change, they would be entitled to a minimum of 5.6 weeks paid leave per year at their normal remuneration. 

Salaried workers where pay varies

Where a worker is contracted to work the same number of hours each week, but does regular overtime or receives regular additional payments (such as commissions and bonuses), holiday pay needs to reflect an average week’s pay (or portion of a week if taking less than a week’s time off) calculated over the previous 52 weeks’ pay. 

You would ignore the following:

1 .Weeks where no pay was received at all

2. Weeks where the worker was on holiday

3. Weeks where pay was reduced due to statutory payments (such as SSP or SMP)

For the above scenarios, count back until you have 52 week’s normal pay (you can use a maximum of 104 weeks if necessary), then work out an average week’s pay.

If the worker does not yet have 52 weeks of pay, you would average the pay over the number of weeks available.

The 52 weeks used for the calculation of average holiday pay ends on the last day of the previous pay reference period.  A “week”, for calculating average holiday pay would run from Sunday to Saturday, although weekly paid workers may have a different start and end day.

Casual/Zero hours workers

A worker who does not work regular hours is still entitled to a minimum of 5.6 week paid leave for a full year of contracted employment, regardless of how many weeks they actually worked in that year. This should not be converted into days or hours and, as such, there is no guidance as to how to do this.

Holiday pay for casual/zero hour workers is calculated in a similar way to salaried workers in that you look at the average of 52 weeks of pay, with the exception that you do not exclude holiday pay weeks taken previously. You do, however, still exclude unpaid weeks and in the view of HMRC and ACAS, you should still also exclude weeks where statutory payments were received.

If an annual leave request is in days or hours, this should be converted into a fraction of a week for holiday purposes.  For example if casual worker can work 5 days a week but requests 1 day holiday, it is recommended that you record this as the worker having taken 0.2 weeks annual leave.

General Information

When calculating average holiday pay, employers only have to apply the averaging calculations to the first 4 weeks of leave that falls under the Working time Directive and the remaining 1.6 weeks additional leave can be paid at standard rate if you have a salaried employee with additional payments. This should be recorded separately.

Underpayment of holiday pay by not following the above guidance is deemed an Unlawful deduction of wages and as such, significant backpay may be due if a worker brings a claim. The employer may have to recalculate up to 2 years of incorrect holiday pay and pay the shortfall to the worker and any other workers who follow with their own claim.

A worker has 3 months to bring this concern up with the employer and if, during the 2 years prior, there has been a period of 3 months or more where no unlawful deduction of wages was made, then the backpay would stop there.

What pay elements to include in holiday pay calculations

It is up to the employer to decide what payment types should be used when calculating average pay, although it should be remembered that if the payment is regular; it is likely that that it should be included.  For example, contractual and non-contractual overtime performed on a regular basis, regular commission payments as well as other regular additional payments should be included.  Non-intrinsically linked bonuses have not yet been tested through the courts, however employers are advised to use a common sense approach in their decision to use bonus payments or not.

What to do now if you are unsure about your processes

Employers should consider if their current method for calculating holiday pay is correct and if it is not they should review their records to identify the liability.  Employers should then decide whether to pay backdated liability at that point or wait for possible legal challenges.

Employers should also be aware that all worker have a right to take holiday and employers have a responsibility to ensure their workers are getting enough rest.  An employer can request that workers take certain days or weeks holiday in a year, but they must give the worker double the notice.  For example, if you require a worker to use a week’s leave, you must give them two or more weeks’ notice of this. 

The 4 weeks of annual leave within regulation 13 cannot generally be carried over to a following leave years, unless the worker has been unable to take annual leave due to long term sickness or maternity leave and in those cases, holiday entitlement should carry over. The 1.6 weeks of annual leave under regulation 13A may be carried over for one leave year, but no more.

Unutilised holiday should only be paid to a worker where they leave part way through a holiday year or the leave being paid is above the statutory minimum.

Further guidance can be found here.

Following our attendance of a recent webinar held by the Chartered Institute of Payroll Professionals (CIPP), the above is our understanding of the current situation, however as this also falls within the employment law bracket, we recommend that you also undertake your own research and obtain specialist legal advice if required.