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Holiday pay – What you need to know

10 Jun

The calculation of holiday pay can be quite confusing. The general recommendation is that holiday pay should be calculated upon all elements of ‘normal remuneration’ which are ‘intrinsically linked’ in order to perform the associated tasks required under the contract of employment.

The basic principle of the Working Time Directive is that workers should not be penalised financially for taking annual leave. In cases where members of staff are not entitled to any bonuses, overtime or other payments, this calculation is usually relatively simple. However, when staff are entitled to these extra payments, things can get a little more complicated. Below, we look at the key things to consider when calculating holiday pay.

Overtime

Generally, overtime can be broken down into guaranteed, compulsory and voluntary overtime. The position under the Employment Rights Act 1996 is that overtime which is both guaranteed and compulsory constitutes ‘normal working hours’. As a result, this should be included when calculating holiday pay for the statutory minimum of 28 days under the Working Time Regulations 1998.

However, where overtime is compulsory but not guaranteed, this only needs to be included in the calculation of holiday pay for the 20 days of annual leave provided under the Working Time Directive. Additionally, voluntary overtime may only be included where the overtime has been paid regularly enough to count as ‘normal remuneration’ but again, this is only for the 20 days of annual leave provided under the Working Time Directive.

Commission

Whether commission should be calculated will depend on whether commission is linked to the performance of a worker’s duties. If so, this should be included for the 20 days of annual leave provided under the Working Time Directive.

Bonuses, Shift Allowances, Standby or On-Call Payments

Where a bonus, shift allowance, standby or on-call payment is paid regularly, this would fall within the definition of ‘normal remuneration’ and again this would only be for the 20 days of the Working Time Directive.

What isn’t included in the calculation of holiday pay?

There is no need to include any payments in relation to benefit in kind, bonuses that are not linked to performance, expenses that are reimbursed, one-off bonuses and infrequent overtime.

Reference period

Currently, the accepted reference period for calculating a worker’s holiday pay is the 12-week period prior to the commencement of annual leave. However, this may be altered for certain situations, including where annual leave is taken following maternity leave or during sickness, and for zero-hours or atypical workers. In response to Lord Taylor’s review, the Government’s Good Work Plan is implementing a change to the reference period for holiday calculation to 52 weeks, as of 6 April 2020.

Working Time Directive

The Working Time Directive provides requirements for 20 out of the 28 days required for annual leave and many elements of pay do not have to be included in the remaining 8 days of annual leave covered by the Working Time Regulations and Employment Rights Act. As a result, there is question as to which part of the 5.6 weeks should constitute the 20 days of the Working Time Directive.

There is no legal standpoint on this topic. However, case law has suggested that as the additional 8 days of annual leave is classed as ‘additional leave’, this calculation should come after the calculation of the 20 days for the Working Time Directive proportion. This means that the first four weeks of annual leave should include the elements of pay as discussed above for the requirements of the Working Time Directive.

Have a question?

If you need advice on the above or anything else relating to HR and Employment Law, get in touch today by calling 02920 853794 or emailing lauren.hill@thomas-carroll.co.uk.