Changes to Holiday Pay

Posted on November 13, 2014 by Stipendia Office

Last week it was announced that The UK Employment Appeal Tribunal (EAT) has ruled under the Working Time Regulations (WTR) that non-guaranteed overtime should be factored in when calculating the amount of holiday pay that an employee is entitled to. We’ve provided you the answers to the most frequently-asked-questions surrounding this news.

What holidays are UK workers allowed?

By law, all UK workers on a five-day week are entitled to 28 days a year paid holiday. Part time workers are entitled to the same level of holiday albeit pro rata. Employers are allowed to include bank holidays within the annual leave period, and they are also expected to pay you for holiday you’ve built up if you leave your job without having used the full entitlement.

How is holiday pay calculated?

The government states that employers should use basic pay when calculating how much a worker should get paid while they are on holiday. This was outlined in the Working Time Regulations Act of 1998. It means that overtime and commission, which normally help to increase average pay levels, is not included when calculating basic holiday pay.

How is the new system different?

Holiday pay now needs to include pay for non-guaranteed overtime which was worked by the employee in the 12-week period before the holiday. Non-guaranteed overtime is overtime that the employee is contractually required to work, but which the employer doesn’t promise to offer.

Previously, employers have been paying holiday pay based on an employee’s basic pay but now employers will have to take into account certain types of overtime, and potentially bonus payments and commission, when calculating holiday pay, rather than just considering basic pay.

Does this apply to voluntary overtime?

No. Although there will no doubt be further debate and case-law over whether overtime is voluntary or not and it is likely that future case law will determine that regular voluntary overtime will be deemed “normal pay”.

What does the ruling to include overtime for holiday pay apply to?

It only applies to the first four weeks (including bank holidays) of holiday taken in each holiday year. The remaining 1.6 weeks’ holiday (as required by UK law) or any additional contractual holiday can be based on normal remuneration, excluding overtime.

This also means that business owners may have to pay out for previous underpayments as well as potentially having to pay out for more holiday pay going forward. This is due to the fact that employees will be able to claim backdated holiday pay.

As a business owner, what steps should I take following the ruling?

Businesses with non-guaranteed overtime have four options:

You can decide whether you are going to do nothing (which could result in a claim or at least impact on employee relations).
Pay all leave at the same rate (an average of relevant pay over the previous 12 weeks)
Have a two-tier method of calculating holiday pay (payment for the first 20 days only and then a different method of payment for holiday over and above 20 days).
Paying an additional percentage of all non-guaranteed overtime undertaken by the employee reflective of their statutory annual leave entitlement (this would need to calculated carefully).

You will also need to consider whether you budget in the current financial year for any valid claims your employees may have for backdated pay.

All businesses should also review your contracts and processes, which would include:

Changing contracts to provide for voluntary rather than “non-guaranteed overtime”
Limiting or refusing holidays after periods of high overtime.
Using agency or bank staff to cover periods traditionally covered by overtime.