Holidays and how to calculate holiday pay are one of the most complicated issues facing HR professionals and businesses. Superficially it is simple everyone working full time is entitled to 28 (5.6 weeks) days paid holiday a year which includes the 8 bank holidays in England and Wales. They are paid at their daily rate. If staff work say three days a week their holiday entitlement is prorated downwards using the formula 5.6 x number of days worked, in this case 16.8 days.
However as one drills down it becomes more complex as the 28 days is actually built up of the 20 days mandated by the working time directive which originates from the EU. All ECJ rulings only apply to these days the remaining 8 days were tacked on by Gordon Brown and are not subject to EU findings…. For now. The Labour party has said they will treat the 8 days in the same manner as the 28 days. Most employers already do this although it is not a legal requirement.
Over the past few years, the courts have made the following rulings affecting how holiday pay is calculated for the 1st 20 days the remainder can be paid at the basic daily rate.
Apart from certain special circumstances e.g. on termination, payment in lieu of untaken holiday is unlawful as holiday is deemed to be necessary for rest and recreation.
1. Holidays and holiday pay are accrued during sickness absence.
2. Holidays and holiday pay are accrued during maternity and other family related leaves; these can be carried over into the next holiday year if the employee was already on family leave during the current holiday year.
3. To establish the amount of untaken holiday which can be utilized by an employee who was off sick the employer must look back to the previous 18 months of absences.
4. If staff are unable to take holidays due to covid related issues they are allowed to carry over for up to 2 years that portion which was untaken.
5. Holiday pay for the 1st 20 days must be calculated to include overtime, shift and stand in allowances, bonuses, commissions and other allowances but not expenses. The rationale is that people should not suffer a loss of income if they were only paid their basic pay while on holiday. The courts have ruled that people must take holiday as it is a health and safety requirement. Staff can only be paid in lieu of holiday when terminating their employment.
6. To calculate the correct holiday pay for staff whose pay varies because of these allowances it is necessary to look back over the previous 52 weeks salary payments to establish the average daily rate of pay.
7. The method of calculating how much an employee is entitled to holiday pay if they are on a zero hours contract can no longer be calculated using 12.07% of the hours worked each month. The approved but cumbersome method is again to go back over the previous 52 weeks missing out weeks when no work was done to calculate an average figure to use for holiday pay. For people on term time contracts it is even more complex.
8. If an employee suspects he has been underpaid because of a failure to include allowances when calculating holiday pay he /she can bring a claim for unlawful deduction of wages going back over the previous 2 years.
9. If an employee has been prevented from taking their vacation the courts have ruled they can go back to the start of their employment claiming unpaid holiday.
To minimise your exposure to these claims I recommend you carry out an audit of how you calculate holiday pay and ensure that going forward you comply with these rules.
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