Holidays and holiday pay: What employers need to know 

While the right to 28 days’ paid holiday was a welcome addition to workers’ rights, employers have been less enthusiastic about the complicated development of the rules, particularly if staff work irregular hours or their pay packets include commission or bonus payments.  

With the law being so hard to navigate, it is easy to unwittingly miscalculate holiday pay or to wrongly deny your employees the right to carry forward holiday. This could leave you exposed to an employment tribunal claim for back pay.  

We have summarised below how to calculate holiday pay, the circumstances in which workers can carry forward holiday and how to manage the issue of rolled-up holiday pay, as well as how things may change in the future.  

Calculating holiday pay 

Calculating holiday pay is straightforward for workers whose remuneration does not vary with work done. It is a simple calculation and they should be paid their normal pay for periods taken as annual leave.  

For other workers, however, whose salaries vary because they receive additional payments on top of their basic pay, the position is not so straight forward. 

The first step is to determine if you are calculating pay for the first 20 days of paid leave (which arise from a European directive) or the further 8 days (which arise under UK law). This is because different rules apply. If you give workers more than 28 days’ holiday, you can determine the rules for those additional days. Make sure you set them out clearly in the employment contract or in an annual leave policy.  

For the first 20 days’ holiday, only those payments which are considered ‘normal remuneration’ are payable. This means you should include payments that workers receive repeatedly or on a regular basis. This can include commission and overtime payments and some bonuses and allowances (for example, shift allowances, standby or on-call payments and work-related travel allowances) that form part of ‘normal remuneration’. If in doubt we can review payment patterns to advise you on which payments, and what proportion of a payment, you should include in your calculation to avoid you potentially underpaying staff when they take holiday.   

Different rules apply to calculating a week’s pay for the remaining eight days’ holiday. This involves taking an average of all remuneration earned in the previous 12-week period. You may have to include additional payments, but this will depend on whether a worker works normal hours or not, and whether pay varies according to the times worked or the amount of work done. Again, we can review the working patterns to ensure you are calculating holiday pay correctly. 

Do workers have to use up all their holiday in one year? 

Workers must take four weeks’ holiday during the leave year. Employers should ensure that this is possible. But if the employee is unable to take four weeks’ leave because they are absent on sick leave, the employee can carry their holiday entitlement forward into the next leave year. If they are absent on long-term sick leave, they can keep carrying forward unused holiday entitlement for up to 18 months from the end of the relevant leave year.   

A word of warning, though: a worker may be able to carry forward holiday for years in respect of which they did not receive paid holiday because they were (wrongly) treated as being self-employed with no right to paid holidays. In such circumstances, the worker may be able to obtain compensation for all accrued holiday, even if this goes back many years.  

Employees on family-related leave (maternity, adoption and shared parental leave) also have the right to carry forward unused holiday from one leave year to the next.  

No more rolling up holiday pay 

Because of the difficulties in calculating holiday entitlement (particularly for casual workers), for many years it was common practice for employers to add an enhancement to a worker’s hourly rate instead of giving paid time off work. This was known as ‘rolling up’ holiday pay.  

Following several UK decisions on the lawfulness of rolled-up holiday, the issue was referred to the European Court of Justice (‘ECJ’) to determine. The ECJ held that the practice of rolling up holiday pay was incompatible with European laws and was therefore unlawful. 

The practice of rolling up holiday is best avoided because if the worker brought a claim for holiday pay, there is no guarantee that an employment tribunal would take the rolled-up pay received by the worker into account when calculating any outstanding holiday pay liability against you. 

Instead, payroll software packages are available that will calculate holiday entitlement for workers with irregular hours. Alternatively, the government’s holiday ready reckoner tool is helpful. You can then let the worker know about holiday as they accrue it.  

The future for holiday pay 

The rules for calculating holiday pay for workers with irregular hours will change from 6 April 2020. A week’s pay will be averaged out over the previous 52-week period (or the number of complete weeks for which the worker has been employed if that period is less than 52 weeks), instead of the previous 12-week period, to take account of seasonal variations.  

With the number of claims lodged with employment tribunals rising and workers’ rights increasingly in the news, now is the time to ensure you are paying the right holiday pay and allowing carry forward of holiday where appropriate.  

For a review of your holiday pay policies and practices or help with another employment law matter, please contact us

Chris Tutton