April 25th 2016

Alister Biggar takes a look at recent changes to current legislation which should be considered when calculating holiday pay.
Alister Biggar
With the main holiday season just around the corner, we thought we would take a look at holiday pay and how it is calculated. Some recent court cases have meant that employers and employees need to now follow new rules when calculating holiday pay.

Key points include:
•    Guaranteed overtime and normal non-guaranteed overtime should be considered when calculating a worker’s statutory holiday pay entitlement but there is currently no definitive case law that suggests voluntary overtime needs to be taken into account.
•    Commission should be factored into statutory holiday pay calculations.
•    Work related travel may need to be factored into statutory holiday pay calculations.
•    A worker’s entitlement to holiday pay will continue to accrue during sick leave.
•    There are different rules for calculating holiday pay depending on the working patterns involved.
•    Workers must take their statutory paid annual leave allowance and can only be paid in lieu for this when their employment ends.

But if we look at each of these points in greater detail as follows:

Guaranteed overtime

Guaranteed overtime is where the employer is obliged by the contract to offer and pay for agreed overtime. Guaranteed overtime must be included within the calculation of holiday pay.

Non-guaranteed overtime
Non-guaranteed overtime is where there is no obligation by the employer to offer overtime but if they do then the worker is obliged by the contract to work overtime.

•    Workers should have their normal non-guaranteed overtime taken into account when they are being paid annual leave.
•    Only 4 weeks annual leave entitlement under the original Working Time Directive are covered by this judgment, rather than the full 5.6 weeks’ leave provided by the Regulations as they operate in Great Britain.

Commission is usually an amount of money a worker receives as a result of making sales and can make up some or all of their earnings.
Commission must be factored into holiday payments for the 4 weeks of statutory annual leave required under European law. There is no requirement to do this for the additional 1.6 weeks of statutory annual leave under UK law or for any additional contractual annual leave allowance. This means that at present, there is no definitive answer about how such holiday pay calculations must be made, or how/if claims can be backdated.

Work related travel
Work related travel can have a number of different meanings but for most employment matters, this will usually mean any travel that is made for work purposes that is not a part of a workers commute to their usual place of work. Where payments are made for time spent travelling to and from work as part of a worker’s normal pay, these may need to be considered when calculating holiday pay.

Holiday pay and sick leave
When a worker takes paid or unpaid sick leave, their annual leave will continue to accrue. If a worker is unable to take their annual leave in their current leave year because of sickness, they should be allowed to carry that annual leave over until they are able to take it, or they may choose to specify a period where they are sick but still wish to be paid annual leave at their usual annual leave rate.

Different working patterns
No matter the working pattern, a worker should still receive holiday pay based on a week’s normal remuneration. This usually means their weekly wage but may include allowances or similar payments.

•    For workers with fixed working hours – if working hours do not vary, holiday pay would be a week’s normal remuneration.
•    For workers with no normal working hours – if a worker has no normal working hours then their holiday pay would still be a week’s normal remuneration but the week’s pay is usually calculated by working out the average pay received over the previous 12 weeks in which they were paid.
•    For shift workers – if a worker works shifts then a week’s holiday pay is usually calculated by working out the average number of hours worked in the previous 12 weeks at their average hourly rate.

Payment in lieu of holidays?
While workers are in employment, 5.6 weeks of their annual leave (this is the amount all UK workers are entitled to by law) must be taken and cannot be paid off. Anything above the statutory allowance may be paid in lieu but this would depend on the terms of the individual contract.
When a worker’s employment is terminated, all outstanding holiday pay that has been accrued but not taken (including the statutory holiday allowance) must be paid.

Here to help
As you will see this is undoubtedly a complex area but we hope we have explained the key areas that employers should be aware of. If you would like advice on calculating the correct rates of holiday pay within your business then don’t hesitate to get in touch with one of the team here at JRW. And if you do manage a little time off this summer then enjoy your holiday!

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.