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Spotlight on Holiday Pay

With many employees starting to book their summer holidays we thought it would be a good time to have a look at holiday pay. This has been an area where a number of developments have taken place previously, particularly in relation to overtime, so where are we now?

Below we look at some common working patterns and the calculation of holiday pay for these types of employees.

1. Employees whose working hours and pay don’t vary

Calculation of holiday pay for these employees is usually straightforward, simply paying them as you would if they had been at work.

2. Employees who have no normal working hours and whose pay varies

These are often employees who work on zero hours contracts. To calculate their holiday pay you need to work out their average weekly wage. You usually do this by adding up all the pay they have earned in the 12 weeks immediately preceding their holiday and dividing it by 12. That is then the amount you pay them when they take a weeks’ holiday.

Bear in mind that the 12 weeks you use must be those where remuneration was payable for hours during which the worker was actually at work. If for example, the employee has been off sick for a week or no work was provided, you will need to ignore that week for the purpose of your calculation and bring in an earlier week so that all the weeks you are using are representative of the employee’s pay.

3. Employees who work non-guaranteed or voluntary overtime

If employees regularly work voluntary overtime or non-guaranteed overtime (that is where the employer is not obliged to provide the overtime, but the worker is obliged to work it if requested), pay for this needs to be included in the calculation of holiday pay for the first 20 days of holiday.

The courts reached this position in part because a failure to include overtime payments would mean that employees would earn less when on holiday than when in work and this would be a deterrent to taking holiday, which is not permitted.

Whilst the courts haven’t set down exactly how holiday pay is to be calculated in this situation, they have said that it needs to be calculated over a ‘representative period’. In most cases, using a 12 week reference period as you would for an employee who has no normal working hours will be appropriate. However, there may be cases where a different reference period may be necessary as it would be more representative, for example if a business has significant seasonal fluctuations.

Whilst case law only requires non-guaranteed/voluntary overtime to be included in the calculation for the first 20 days of statutory holiday, in practice many employers will wish to include it in the calculation for the entirety of an employee’s holiday entitlement. This may be more costly but administratively it usually makes it easier to manage.

If you are unsure whether overtime undertaken by your employees may be ‘regular’ and should be included in holiday pay calculations, please contact your Employment Law Specialist to discuss your situation.

Looking Ahead

There are changes on the way when it comes to calculating statutory holiday pay. From 6th April 2020 the 12-week reference period currently used to calculate holiday pay in some circumstances will be no more. Instead, holiday pay will be calculated based on 52 weeks (or the number of complete weeks for which the worker has been employed, if that period is less than 52 weeks).

This change will ensure that employees who do not have a regular working pattern throughout the year are not disadvantaged by taking their holiday at a quiet time of the year when their weekly pay might be lower.

If you have an employment law matter you require assistance with, please do not hesitate to contact Kingfisher Professional Services Ltd as we are happy to help.