Holiday pay has been a confusing and changing landscape for over 5 years now, the result of a number of different employment tribunal cases.
On 6th April 2020 we see a change in legislation which increases the reference period for determining a weeks pay for workers from 12 weeks to 52 weeks. But, why do we need a reference period?
All workers have a statutory right to 5.6 weeks holiday each year. When a worker is full time and paid a regular salary only this is straight-forward. However, many workers work part time or irregular hours and have payments in addition to salary (e.g. overtime, commission, bonuses).
There have been many cases over the past 5 years challenging different types of payments and whether they should be paid during holiday. The cases are numerous, details often specific to each case. The key to note is the overall focus of each of these cases is that individuals should not be deterred from taking holiday. If an individual earns less by taking their holiday that would deter them from taking holiday.
As from April 2020, when a worker works variable hours their holiday pay should be calculated on an average of the previous 52 weeks pay. Prior to April 2020 this was just 12 weeks. This change has been brought in the make holiday pay more reflective of actual pay, preventing someone taking holiday just after a peak period and being paid a lot more for that holiday as a result. Equally someone is not disadvantaged by taking holiday during a quiet period.
If holiday pay is written into your contracts at a 12 weeks average, do consider that paying a 52 week average may result in payment lower than their contractual entitlement.
It’s not just workers with variable hours that should have their holiday pay calculated as an average. The same applies to those with variable pay, examples include:
- contractual overtime
- voluntary but regular overtime
- attendance payments
- premium payments for part of their job - e.g. a pilot being paid a premium for hours spent in the air
Put simply, any payment associated with being a worker that they would normally earn by being at work.
It should also be noted that as many of these decisions are European legislation they only apply to 4 weeks, not the additional 1.6 weeks applied by UK legislation. That said, many businesses find it too high an administrative burden to pay 4 weeks holiday differently to 1.6 weeks.
There will be some exceptions. Commission is a common one, for example if commission is paid to all based on team earnings and therefore would continue to be earned and paid when the individual is on holiday this would not be added to the holiday pay calculation. The aim is only for the individual to earn what they would normally not to earn more.
Rolled Up Holiday Pay
Rolled up holiday pay is the practice of increasing the hourly rate to include a payment for holiday, usually 12.07%. This practice has been ruled to deter individuals from taking holiday and is therefore not lawful. This method would allow an individual to work a full 52 weeks per year and receive payment for 57.6 weeks, therefore being financially better off working and not taking holiday.
Holiday entitlement is about providing breaks for work. There should be no detriment for taking those breaks and they should be paid at the time the holiday is taken. That said, a recent judgement did say that if the pay is transparent and comprehensible there are occasions where rolled up holiday could be used. This is more likely to be acceptable for a worker who works occasional hours and therefore has periods of time without work.
Term Time Holiday
In 2019 a music teacher successfully claimed in an employment tribunal they were entitled to the full 5.6 weeks holiday despite only working part of the year (during term time). As a result, employers who employ staff on term time (and other part year) contracts should ensure that the contract provides for 5.6 weeks holiday where they are employed for the full year. The holiday pay should be calculated on an average of weekly pay as outlined above.
The past 5 years have seen a changing landscape for holiday pay, unhelpfully for employers this has been drip fed through a number of different cases and there is no guarantee this is the end of the changes. Simply put, anyone who’s hours of work vary should have their holiday calculated based on an average of their weekly pay over the past 52 weeks (from April 2020).
If pay varies and/or additional payments are made over normal wages or salary these should be included in holiday pay if the worker would suffer a detriment and the payments are normally associated with their being a worker. Silk Helix advice clients receive advice and support on calculating holiday pay as part of their package. We also offer a Free 30 minute advice call, if you’re not a client and want advice on payments give us a call and we’ll happily talk through your specific situation.
Article last updated: 1 April 2020
Explore our Knowledge Hub for more like this.