August/September 2019

Holiday Pay: Could your business be at risk?

Managing leave for your staff is one thing, but have you also considered if you are paying workers correctly when they are on holiday? The rights surrounding annual leave and holiday pay have been in a state of flux for some years.

Recap: the law
In brief, the right to annual leave and associated pay is set out in the Working Time Directive, which derives from Europe. The UK implemented the Directive into the Working Time Regulations 1998 (“WTR”) which provide employees and/or workers with 5.6 weeks entitlement per year, this translates to a basic minimum entitlement of 28 days. There is no right to bank/public holidays but most employers usually incorporate these 8 days into the 28 day leave entitlement. Part time workers are entitled to a pro rata equivalent. Under the WTR the worker is entitled to be paid for the holidays taken using a formula as set out in the Employment Rights Act 1996. Failure to properly calculate holiday pay could result in an unlawful deduction from wages claim from workers and/or employees. Importantly, there is a mechanism which allows claims to be brought as a “series of deductions” which can link any underpayments throughout the working relationship. The time limit for bringing these claims is 3 months from the date of the last deduction (unless ‘unreasonably practicable’ to do so).

Holiday pay – what to include?
Workers are entitled to be paid their normal pay during periods of annual leave, and that “normal pay” is not limited to basic pay but could include elements such as overtime, commission and allowances. In 2014 the Employment Appeal Tribunal (EAT) decided that some types of overtime should be included in holiday pay. That case also considered how far back a worker could go when claiming a ‘series of deductions.’ In this case workers tried to claim for underpaid holiday pay stretching back over a number of years. However, the EAT decided that any period of 3 months or more between the deductions would break the series. Given that most people have over a 3 month break between holidays, this case had the effect of preventing workers from claiming all the way back to the start of their employment (or 1998 when the WTR were introduced). Following this decision, the government introduced legislation to restrict any claim for underpaid holiday further by imposing a maximum 2 year backstop. This significantly reduced the impact of the European cases and was welcomed by businesses.

Current position
Following the 2014 case uncertainty still remained regarding the calculation of holiday pay and what constituted a ‘series’. Questions were also raised about whether the ‘series’ could be broken by making a one off correct payment. Last month, the Northern Irish Court of Appeal provided a decision estimated to cost the Police Force £40 million in backdated holiday pay. In summary, the court decided that police officers’ holiday pay should have included overtime and various allowances and these police officers were entitled to claim for this element of leave, with some claims dating back to 1998 (when the WTR came into force).

This case is not binding in domestic courts, but this decision could be taken into account when faced with a claim for backdated holiday pay. Further, given the significant sums involved in this case, it may be appealed to the Supreme Court. If so, any decision made by the Supreme Court will be binding on all UK courts. Importantly, the court did not consider the two year cap on backdated holiday pay claims as provided for in the domestic regulations as they do not apply in Northern Ireland. These regulations are likely to be challenged in the near future as there is some concern that they are not compatible with the Working Time Directive.

Tips for managing the risk
There is a dynamic and unsettled area of law, but it is now clear that companies must include the relevant allowances when calculating holiday pay. Whilst some uncertainty remains, there are a number of things businesses can do in order to manage the risk of a future claim for underpaid holidays:

  1. Review your working arrangements – are there any ‘self employed’ contractors who could argue that they are ‘workers’ and entitled to back paid holiday;
  2. Perform an audit of anyone who could potentially be entitled to back pay and perform a calculation of what the financial sum this could look like;
  3. When performing calculations take into account commissions/bonuses/overtime if they are sufficiently regular and are “intrinsically linked” to the work;
  4. If a shortfall in holiday pay is established, act quickly to correct the calculations to ensure that future payments incorporate all relevant entitlements.
  5. Given the complexities in this area, if you have any queries, you should seek specialist advice.

Chloë Leyland
Enhanced HR Solutions