Pay and holiday entitlement are amongst the most important things an employer should get right. Your employees rely on consistency. If you haven’t changed or looked at your holiday pay policy for a few years, then now would be the time to review it. You might be paying too little or too much, so make sure you have the facts.
It should be noted that both “workers” and employees have a minimum holiday and holiday pay entitlement, but in this article, we refer to just employees.
There have been many significant court cases (even in the supreme court)1 about employees not being paid enough holiday pay. It’s often brought into consideration whether regular overtime and commission should be accounted for in holiday pay. These types of cases are usually brought as claims for unlawful deduction from wages under the Employment Rights Act 1996.
The intention of the case law appears to be to ensure that workers receive their ‘normal remuneration’ for certain holiday periods. This is so that employees aren’t discouraged from taking their holiday entitlement.
This means that the following would be included in holiday pay for the relevant holiday periods:
We’ll call these items ‘Extra Holiday Pay’.
The holiday pay rules are different for where an employee has (or does not have) ‘normal working hours’ under their contract.
Working pattern | How a week’s pay is calculated2 |
Regular hours and fixed pay (full or part-time). | A worker’s pay for a week |
Shift work with regular hours (full or part-time). | The average number of weekly fixed hours a worker has worked in the previous 52 weeks, at their average hourly rate. |
Irregular hours and part-year work. | A worker’s average pay from the previous 52 weeks (only counting weeks in which they were paid). |
To work out a week’s pay for someone who’s paid monthly:
Use the weekly pay calculation for each of the last 52 weeks to work out an average week’s pay.
If the employee has ‘normal working hours’, then:
Where the employee doesn’t have normal working hours; or their pay varies according to the amount of work done (e.g. pieceworkers) or the time of work (e.g. where pay is dependent on varying shift patterns), then all leave must be paid at their ‘normal’ rate of pay. This includes commission, regular overtime payments and any payments related to length of service.
It’s important you know the details around such an important issue. If you’re not sure, GOV.UK sets out the rules based on different working patterns.
Now that you know what you should be paying your employees, you might be asking yourself; what if I’ve underpaid people and will it come back to haunt me? Have I made unlawful deductions? Before getting too worried, there are some important rules on backdating holiday pay and wages claims you should know about:
This principle isn't always straightforward, so you should seek legal advice.
It’s important to review your current systems and take these steps to manage any future issues regarding holiday pay and employees:
If you’re concerned about any of the rulings and legislation surrounding holiday pay, or have questions about retrospective holiday payments, contact a Marsh Commercial Risk Management Consultant or seek advice from an employment law expert.
Sources
1. peoplemanagement.co.uk/supreme-courts-landmark-holiday-pay-ruling
2. gov.uk/holiday-entitlement-rights/holiday-pay-the-basics
The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.
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