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How To Calculate Holiday Pay

20th Jul 2015
Employee Benefits, Employment Law, Human Resources, Payroll

In addition to current legislation, a number of recent court judgements should be considered when calculating holiday pay. This means that the rules employers and workers follow to calculate holiday pay may need to be updated.

Key Points

  • Guaranteed 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.

Guaranteed Overtime

Guaranteed overtime is where the employer is obliged by the contract to offer and pay for agreed overtime. Following a judgement in 2004, 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.

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.

The judgement has clarified that:

  • Workers should have their normal non-guaranteed overtime taken into account when they are being paid annual leave.
  • Anybody making a claim must have had an underpayment for holiday pay that has taken place within three months of lodging an employment 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 judgement, rather than the full 5.6 weeks’ leave provided by the Regulations as they operate in Great Britain.

This judgement may have an impact in situations where non-guaranteed overtime is carried out by workers on a regular or consistent basis.

It is unlikely to have an impact in situations where non-guaranteed overtime is either already factored into holiday pay, or possibly where this overtime is only used on genuinely one-off occasions.

Limit on a claim for an underpayment

On Thursday 18 December 2014 the Government announced a planned change to the Employment Rights Act 1996 in relation to claims for deduction of wages.

The change will mean that when making claims for a series of backdated deductions from wages, including any shortfall in holiday pay, the period that the claim can cover will be limited to a maximum of 2 years.

It is expected that the effect of this change will be 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.

Voluntary Overtime

Voluntary overtime is where the employer asks the worker to work overtime and the worker is free to turn down the request as there is no contractual obligation on either side to offer or refuse overtime. The question of voluntary overtime has not been directly considered by any recent judgments, so there is currently no definitive case law to suggest that voluntary overtime needs to be taken into account when calculating holiday pay.

Commission

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 provided under UK law, or for any additional contractual annual leave allowance. This was confirmed on 22 May 2014 when the European Court of Justice heard the case of Lock v British Gas Trading Ltd.

At present, there is no definitive legal answer about how such holiday pay calculations must be made, or how/if claims can be backdated.

The Lock v British Gas Trading Ltd case has been referred back to the UK to consider how commission is calculated into holiday pay for that particular case. While part of the case was heard at the Employment Tribunal on 5 February 2015, the final judgment has not yet been made. When the judgment is made, it is important to note that an Employment Tribunal judgment is not binding on any other case – it would need to be appealed to the Employment Appeal Tribunal to have such an effect.

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.

On 4 November 2014 the Employment Appeal Tribunal issued a judgment in a case joined to Bear Scotland v Fulton which covers how holiday pay should be calculated in relation to work-related travel.

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 sickness

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.

Calculating holiday pay for 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. Some of these payments might include the situations described earlier on this page, such as commission.

  • For workers with fixed working hours – If a worker’s 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 statutorily entitled to) 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 contract.

When a worker’s employment is terminated, all outstanding holiday pay that has been accrued but not taken (including the statutory allowance) must be paid.

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