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Mistaking holiday entitlements can prove costly

Employers should be aware of employee holiday entitlements, from overtime and commissions to locum working

22 January 2020, at 9:00am

Practices, like any other employer, often suffer from holiday pay headaches, confused about what to include or what reference period to use when calculating what is due. The problem is that the law is complex and a number of cases have made navigating this very difficult.

Before we go into the detail, Andrew Rayment, a partner in the employment team at law firm Walker Morris LLP, says that it’s important to look at the key entitlements. “In essence,” he says, “workers are entitled to a minimum of 5.6 weeks paid annual leave (that’s 28 days for someone working five days a week); bank/public holidays can be included in this minimum entitlement. Of this 5.6-week entitlement, four weeks are granted by European law (known as Euroleave) and an additional 1.6 weeks are granted by the UK’s own Working Time Regulations 1998.”

He says that it shouldn’t be forgotten that part-timers are entitled to exactly the same level of holiday, but pro rata. For example, someone working four days a week gets 22.4 days leave. Further, workers start building up holiday entitlement as soon as they start work.

Employers can, within reason, control when workers take their holiday. But if a worker leaves their job, they should be paid for any holiday they’ve accrued but not taken.

But there is another consideration that Rayment points out here, and it’s one that trips up many employers. He says: “Employees continue to accrue paid holiday, as if they were at work, throughout maternity, paternity, adoption and shared parental leave (known as family leave). Employees may choose to take this holiday before or at the end of the family leave period or a mixture of both.”

He adds that employers may have to allow the employee to carry over (into the next leave year) more annual leave than is usually allowed to ensure that the employee does not lose any of the holiday accrued during the leave. He cautions practices that overtime, commission or bonus may need to be factored into the holiday pay accrued during family leave if it forms part of the employee’s normal pay.

Overtime, commission and holiday pay

For most, it’s a given that basic pay is used to work out holiday pay, but what about overtime? The answer to this question, says Rayment, is that “the calculation must use one’s ‘normal pay’. So, if an employee normally works overtime, it should be included in the calculation of holiday pay.”

Contractual overtime is what an employer is contractually obliged to offer and that which employees are required to work; it must always be included in holiday pay. But as Rayment points out, “the Employment Appeal Tribunal has made it clear that regular overtime that is not guaranteed, but that employees are expected to work if and when it is offered, must also be included”.

But what of voluntary overtime? On this Rayment notes a Court of Appeal decision which considered whether voluntary overtime must be included in the calculation of holiday pay. He says that “it was held that voluntary overtime must be included in holiday pay if it is ‘part of a pattern of work that is sufficiently regular and settled for payments made in respect of it to amount to normal remuneration’”. In simple terms, Rayment says that as a general rule of thumb, the more regular the voluntary overtime, the more likely it should be included in holiday pay.

Just as interesting, reckons Rayment, is the effect of commission on the calculation of holiday pay. In particular, he says that another Court of Appeal decision “made it clear that results-based commission should be taken into account when working out holiday pay”. Of course, the importance of this may be lesser in a veterinary environment compared to other sectors. Nevertheless, it needs noting.

Part-year workers – a new consideration

To this mix comes a recent case where those who only work part of a year are also entitled to the equivalent of a “week’s pay” for each week of leave. For workers who do not have normal working hours, a week’s pay is the worker’s average weekly pay in the 12 weeks before the first day of holiday, excluding any weeks in which no remuneration was payable.

As Rayment highlights, “the worker argued that there was nothing in the law that requires a different approach where, as in her case, a worker does not work a full year” – and the Court of Appeal agreed.

For those interested in this case, he says, “the Court of Appeal held that the Working Time Regulations require only the straightforward exercise of identifying a week’s pay in accordance with the Employment Rights Act and the multiplying of that figure by 5.6”.

As an aside, it should be noted that the 12-week reference period referred to in the case will be increased to 52 weeks with effect from 6 April 2020.

Employees on long-term sick leave

Practices shouldn’t lose sight of workers who have been unable to take their holiday because they’ve been on long-term sick leave. Rayment reminds that workers are entitled to “carry over four weeks’ unused holiday unless the employer allows more to be carried over”. He adds that this holiday must be used within 18 months from the date it’s carried over.

Claims from "hidden workers"

Another trap awaits employers who engage “self-employed” contractors; they should be aware of the potential risks of such individuals bringing holiday pay claims. The European Court of Justice held in a 2017 case that anyone with “worker” status must be able to carry over paid annual leave if they have not had the opportunity to take it or have not taken it because they have been regarded as self-employed and therefore didn’t think they could get paid for holidays.

As Rayment explains, “the Court made it clear that the employers’ ignorance of employment status was no defence for not paying holiday – it said that it was for the employer to seek all information regarding its obligations".

Of course, the application here relates to the use of locums, an area of law which is firmly in the sights of HMRC as well as workers.

Employers that breach the law

With the complexities established, what penalties await those that break the law? Rayment says it’s simple – “workers who believe they have been underpaid holiday pay can bring Employment Tribunal claims for back-payment,” adding: “where there has been a systemic failure to pay the correct amount for a whole workforce the potential exposure can be significant. The fact that the employer may not have realised they were underpaying is not a defence.”

Notice should be taken of the Deduction from Wages (Limitation) Regulations 2014 which impose a two-year back pay limit on deduction from wages claims. Even so, claims may be made without any real cost to the employee since the tribunal fees regime was struck down in the summer of 2017.

In summary

The law surrounding holiday entitlements is a quagmire for employer and employee alike. Practices ought to seek advice if in any doubt about their obligations and employees' rights.