Calculating Holiday Pay - Top TipsPosted in : HR Updates on 21 October 2015
All employers who offer regular ‘overtime’ work, such as those in manufacturing and retail, have needed to keep a close eye on the developments of late on how holiday pay should be calculated.
The question of how much to pay employees during their holiday (and what type of pay to include in the calculation) has been in debate, following a number of high profile court judgments in England and more recently in NI and appear to be pointing to clearer if more expensive requirements on employers.
In manufacturing, where overtime is used extensively, the impact is significant. The EEF surveyed their members and found that over nine in ten manufacturers (93%) said they will see their payroll costs increase, ranging anywhere from adding 1% to over 7% to payroll costs.
The mitigating actions that manufacturers surveyed said they would need to take include:
- 58% say they will need to factor the additional costs into future pay negotiations
- 52% say they may need to reduce overtime
- 33% say they would absorb the costs within the business.
We summarise the position below with some tips for employers. A summary of new requirements;
- Guaranteed and normal non-guaranteed overtime should be considered when calculating a worker's statutory holiday pay entitlement. Recent NI case law (Patterson V Castlereagh Borough Council) suggests that voluntary overtime may also need to be taken into account if it is an 'appropriately permanent feature' of the workers remuneration. This must be considered case by case
- 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.
Non-guaranteed overtime - Bear Scotland v Fulton
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.
On 4th November 2014, the Employment Appeal Tribunal made a ruling in the case of Bear Scotland v Fulton which covers how holiday pay should be calculated when non-guaranteed overtime is worked. Workers should have their normal non-guaranteed overtime taken into account when they are being paid annual leave.
It was previously thought that voluntary overtime would not need to be included in calculations, however in Paterson v Castlereagh Borough Council the Northern Ireland Court of Appeal held that there is no reason in principle why voluntary overtime should not be included in holiday pay, if it is normally carried out and is an 'appropriately permanent feature' of the workers remuneration. The court of appeal has therefore requested that the case be resubmitted to the tribunal to hear further evidence of Mr Patterson's overtime arrangements. While the decision shows that voluntary overtime may have to be included in holiday pay, when it does is still open to debate in each individual case. To require inclusion, the overtime has to be regular and permanent enough to have become part of the workers 'normal remuneration'.
Review your employment contracts
In order to demonstrate a clearer position as an employer, the employment contract must state:
- Whether overtime is compulsory or voluntary (preferably with definitions of each)
- Whether payment or time off in lieu is given
- The rate of overtime pay or how time off in lieu is calculated
- At what point overtime is calculated as part of holiday pay and how this is calculated
- Notice arrangements for overtime working
- The authorisation process e.g. overtime must be agreed in advance and in writing by the employees manager
3-month rule on claims
Anybody making a claim must have had an underpayment for holiday pay that has taken place within three months of lodging an industrial tribunal claim.
If a claim involves a series of underpayments, any claims for the earlier underpayments will fail if there has been a break of more than three months between those underpayments.
Only the 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 the UK.
Limit on a claim for an underpayment
In G.B, a law has been passed to limit the scope for a claim for deductions from pay going back more than 2 years for any claim presented on or after 1 July 2015. The position in Northern Ireland at the moment is not clear although the Department for Employment and Learning will consult on this issue.
Top Tips for Employers
1. Assess working hours. Check if you have workers who regularly work non-guaranteed overtime or if voluntary overtime has become a ‘regular’ feature for any employees.
2. Review the position and decide on action. You may wish to review working patterns and contracts to re-establish a position in light of your initial assessment.
3. Review other allowances. Factor in allowances that are more than expenses, such as commission. Additional benefits should be included in the first four weeks of annual leave.
4. Consider the reference period. The law requires you to pay workers ‘an average’ of their normal pay. UK law on holiday pay generally uses a 12-week average. It has been suggested by that a 12-month reference period would be more appropriate.
5. Check your payroll software. Calculating average pay over 12 weeks prior to each period of annual leave is not practical for many. Payroll software may be able to do this for you.
6. Look at alternative resourcing. Can your resourcing be covered using cheaper alternatives? Using more peripheral workers, such as casual, bank or agency staff, may now become cheaper alternatives.
7. Consider taking specialist advice. Given the legal position is a little clear but still yet to be fully established, mistakes could lead to significant financial liability. Where you identify complex issues or significant cost burdens it will pay to seek professional advice.
More on Pay & Conditions
- Can employers take disability and maternity-related absence into account when calculating an individual’s bonus payments?
- The Harpur Trust v Brazel 
- Can an employer use an unpaid work trial as part of a recruitment process?
- Is it lawful for an employer only to provide payslips electronically to employees?
- Who’s up for a 4-Day Working Week?
The information in this article is provided as part of Legal-Island's Employment Law Hub. We regret we are not able to respond to requests for specific legal or HR queries and recommend that professional advice is obtained before relying on information supplied anywhere within this article.