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Working Out Holiday Pay Is Easy… Right?

Everyone knows that getting your employee’s Holiday Pay correct is very important. Yet it seems employees frequently feel like their bosses are getting it wrong. The lack of clarity on the subject is highlighted by the volume of tribunals, whose rulings work towards establishing future precedents. 2015 saw a case involving council workers’ holiday pay entitlement and overtime. If you need proof that holiday pay disputes are rarely cut and dried, as recently as June 2019, a Court of Appeal had to rule on a very similar issue. In short; court cases have never been a perfect solution.

What Do People Get Wrong?

Holiday pay mistakes tend to occur in one of two ways:

  • A fundamental calculation mistake is made on the actual entitlement that an employee is due, perhaps due to part-time hours, or 0 hours contracts; or
  • An incorrect, although arguably understandable, the assumption is made that holiday pay is based solely upon an employee’s contracted salary and working hours.

If you’re tripping up on the first point and just cannot work out or understand employee holiday entitlements, then please feel free to give me a call. I’ll provide the knowledge you need within a free, five-minute conversation. Even if you just struggle at maths, it always helps to have your mind put at ease by double-checking with a professional.

You may have unwittingly been underpaying holiday pay because you don’t understand the principles by which holiday should be calculated. So, let’s take a closer look.

The Fundamentals Of Holiday Pay

What causes most of the confusion in a contradiction in the framework guiding holiday pay. Events will be uncovered and dealt with as case law emerges but it is useful to understand the two ideas. This way, you have the best chance of fairly implementing holiday pay calculations. The two principles are:

  • Holiday pay must be calculated based upon an employee’s “normal remuneration”; and
  • As an employer, you are not allowed to do anything that would deter an employee from taking their full holiday entitlement.

Without getting into semantics or starting to look at implied terms in employment contracts, suffice to say that “normal remuneration” has not had a definition assigned to it clear enough to totally avoid confusion. This is the problem that is leveraged by the second statement, causing employees to claim that they are being underpaid. It would be more accurate to say that the employee is being deterred from taking their holiday on the basis that the remuneration is not equal to the amount they would expect if they were working.

Clarifying The Issue

With the lack of clarity surrounding the term “normal remuneration”, we arrive at the frequently contentious issue of overtime, be it voluntary, non-voluntary, guaranteed or non-guaranteed. Plus why and when it should or shouldn’t be included in an individual’s Holiday Pay amount. To look at a couple of examples more closely, let’s take the two cases that I mentioned at the beginning of this blog.

Dudley Metropolitan Borough Council  V Willets and others. 2015

In this case, 56 council workers brought claims for unlawful deductions from their wages in relation to the calculation of holiday pay. The workers claimed that their holiday pay should have included payments for purely voluntary overtime. The overtime in this regard, was not enforced by the employer, nor expected of the employees and they could simply sign up for extra shifts as and when they wished.

Failing to do much towards clarifying the term further (in our opinion), the Employment Appeal Tribunal reiterated that Holiday pay must be based upon “normal pay” and determined that in this case the overtime payments were sufficiently regular to constitute “normal pay”. As such, the council workers won their claim and received back paid holiday entitlements.

This case goes a long way to showing that even voluntary overtime may be included within Holiday Pay. What it did not show, however, is a definitive indicator as to how regular the voluntary hours must be in order to apply to the holiday calculation.

N Flowers and others V East of England Ambulance Trust. 2019

Again, in this case, we have employees claiming that their holiday pay should reflect actual hours worked, and not just their contracted working times. Following on from the precedent of the previous case, here, we receive further clarification between the difference between:

  • Non-guaranteed overtime – taken when a shift overruns;
  • Voluntary overtime – when someone volunteers for extra shifts.

Again, the EAT upheld the worker’s claim and stated that both variations of overtime should be included in Holiday Pay calculations. The NHS workers that went beyond their normal duties saw a drop in their pay simply because they chose to use their holiday time.

The clear message that case law is telling us is that whatever the reason for working hours above and beyond your employment contract, they are likely to be required of your holiday pay calculations should they be seen to be “normal pay”.

What Does This Mean For You?

When calculating holiday pay, you may as well ignore the contracted hours you’ve got for your workers. Maybe just use them as a starting, or reference point. You are going to have to look at how many hours, and how much you actually pay the employee. This will help you work out what the courts would consider being the worker’s “normal pay”. From here, you can calculate the holiday pay based upon that amount.

Is it an exact science or solution? Unfortunately not. What happens if you’re working out seasonal “normal pay” for the holiday that is taken within the off-season? A popular method of working out holiday pay which is owed in overtime back pay is to calculate the amount based upon an average of the previous three months. However, what if an employee works heavily for three months and then takes all of his holidays in the off-season? His “actual pay” during the time he is taking holiday would not accurately reflect the previous three months.

The above scenario is just one illustration of the many gaps that have been missed in the implementation of holiday pay rules. In my experience, the best thing to do as an employer is to remember the two principles that I laid out above when considering entitlements. That said, bear in mind that there can be tension between these two principles. Try to be as fair and reasonable as you can, and it is unlikely you will go too far wrong. Case law does set precedents that must be followed by lower courts in the future. That said, I’m sure in 1,000 cases time, we will still find a nuanced case that finds a way to be difficult!

What Can You Do?

As HR professionals, we have a wealth of experience when it comes to dealing with holiday pay queries and its fallout. As an employer, you often won’t think about the intricacies of calculating holiday pay until you are required to do it yourself!

Should an employee make a claim that their holiday pay has not reflected any type of regular overtime work, there is a decent chance that you will be looking at paying 2 years of holiday backpay to that employee.

Now, you may be lucky, and your employees may not have questioned their holiday pay, but I am not in the business of advising employers to cut corners. Especially when it comes to holiday pay!  The good news is, if you have been following correct procedure for three months, you will exceed the initial limit for an employee to make a back-payment claim. This means you won’t have to worry about any large unforeseen expenditures moving forward.

Summary

As an employer, make sure you are working your holiday calculation correctly right now. If you need help or even just reassurance, Kate Underwood HR can help you to work out what exactly constitutes “normal pay” based upon your specific business and industry. We are here to ensure you are protected and compliant.

As an employee, if you think your holidays do not reflect the actual amount you would have received if you were working, we can also help. If you need advice on making a claim, or just want your employer to get their procedures straight, give us a call or send us an email.

We can work with you to ensure your employer is paying you what you are entitled to by law. It is rare that anyone makes a holiday pay miscalculation maliciously. Holiday Pay is often perceived to be very black and white but actually contains many grey areas. Yet, due to the lack of understanding, errors are often made.

Make sure you don’t make mistakes by contacting us on 02382025160 today.

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