Holiday leave and pay: The law

Amy Paxton, senior employment consultant at Croner, explains the law surrounding holiday leave and pay.

Small Businesses need to be aware of pay implications regarding holiday leave

Small Businesses need to be aware of pay implications regarding holiday leave

This article, originally produced for SmallBusiness.co.uk on 13/09/12, was updated on 28/05/14 due to legislatory changes 

It’s almost holiday season and with it the usual headaches for employers.

The provisions contained within the Working Time Regulations 1998 (The Regulations) relating to holiday entitlement, together with recent case law has seen an increase in confusion on what workers are entitled to.

The law

Those who are genuinely self-employed where the organisation is the individual’s client rather than employer are not covered.

However, there have been a number of cases where individuals, who might at first sight, appear to be self-employed (e.g. certain subcontractors), that have been found to be workers since they were contracted to perform work personally.

The right to holidays

The Regulations give workers the right to a minimum of 5.6 weeks’ paid leave per leave year up to a maximum of 28 days.

This entitlement also includes public/bank holidays. Employers can also give workers more holiday than the statutory minimum should they wish to do so.

Workers have the right to holiday from their first day of employment.

The accrual rate for new employees is given at the rate of one-twelfth of the statutory entitlement, rounded up to the nearest half day, on the first day of each month of the first year.

The holiday year may be fixed by a relevant agreement, (typically a Contract of Employment, a Workforce Agreement or a Collective Agreement with a recognised Trade Union).

If not, it runs from the employees’ start date and each subsequent anniversary.

Any holiday entitlement from the original 5.6 weeks’ leave must be taken within the holiday year in question otherwise it will be forfeited.

There is, however, the possibility to carry over any additional leave (extra holiday leave agreed by the employer over the statutory minimum) from one holiday year to the next, if it is specified in a relevant agreement.

Additionally, following the EAT decision in Sood Enterprises v Healy [2013] employees who have been unable to take their annual holiday entitlement because they have been off long term sick, will also be entitled to carry over at least four weeks’ leave from the previous leave year.

If a worker leaves having taken fewer holidays than he or she is entitled to, he or she should be paid in lieu of the untaken holiday.

This does not need to be rounded up but cannot be rounded down.

If a worker leaves having taken more than he or she has accrued, a relevant agreement may provide for a deduction from pay in lieu of the excess holiday.

In any calculation of holiday entitlement during the first year, all fractions are to be rounded up to the nearest half day, except on termination.

Fractions of a day’s holiday at any time apart from in the first year of employment do not have to be rounded up.

Notification of holidays

If a worker wants to take a holiday they should give notice in writing of his or her intention to take any holiday.

Under the Regulations the notice required is equivalent to twice the length of time of the holiday requested.

If for any reason you are not able to let the worker take the time off you must tell them in writing within a further time period equivalent to the length of time of the holiday request.

These notice requirements can be varied or dis-applied by agreement.

You may decide that you want to fix some or all of the holidays.

If you do you will need to give notice in writing to each worker, which should be equivalent to twice the length of time of the holiday to be fixed.

For example should you intend to operate a Christmas shut down you could notify all employees at the start of the year.

Holiday pay

Payment for holidays should be made at the rate of a “weeks’ pay” for each week of holiday taken under the Regulations.

Where the worker has normal working hours (hours and pay does not vary week to week) then payment for holidays should be the same rate as worker’s normal pay and calculated on the basis of the worker’s normal hours of work.

Normally, overtime pay is not counted in calculating the holiday pay for such workers, unless it is guaranteed by the employer and compulsory under the employee’s contract.

However, in the recent case of Neal v Freightliner, the Birmingham Employment Tribunal held that by virtue of a decision by the Court of Justice of European Union overtime payments should be included for at least the four weeks leave as prescribed by the Working Time Directive. Because this is only a Tribunal decision, it is not binding on other Tribunals.

Additionally, the decision has been appealed to the Employment Appeal Tribunal, which is due to be heard on 30 & 31 July 2014.

Pending the outcome of this appeal, employers who do not include overtime payments when calculating statutory holiday pay for those employees with normal working hours may continue with this practice for the time being, at least until the outcome of the appeal is known.

However, employers should be aware that they are accepting the risk that employees may challenge this practice at an Employment Tribunal and in some cases may seek arrears of holiday pay stretching back over a number of years. Employers facing such claims should seek legal advice.

For workers who have normal working hours but whose pay varies from week to week (e.g. pieceworkers), a week’s pay is calculated by taking average remuneration over the previous 12 working weeks.

For employees who do not have normal working hours, a week’s pay is calculated by taking average remuneration over the previous 12 working weeks.

When calculating the 12-week average, you must discount any weeks where the employee received no remuneration and will therefore need to consider earlier weeks where the employee did receive remuneration to bring the total to 12.

If there are no normal hours of work or the rate of pay varies, holiday pay is calculated on the basis of the average pay received by the worker in the previous 12 weeks discounting any weeks where there was no remuneration payable.

If you decide to offer more days than the statutory minimum, you are free to make contractual provisions in a relevant agreement in relation to holiday pay for holiday entitlement in excess of the minimum 5.6 weeks.

An employer is not permitted to pay in lieu of the statutory minimum holiday entitlement unless the worker is leaving the organisation.

Part-time workers

Part time workers have a right to a pro rata proportion of the statutory minimum annual leave entitlement.

For example, a part time worker who works three full days per week, will be entitled to take a three- fifths proportion of the 5.6weeks holiday.

What this means is that he or she will be entitled to 16.8 days paid holiday per year.

There is no requirement to round up entitlements to the nearest full day – although it may be easier to do so for administrative purposes.

However, you cannot round the entitlement down to the nearest day.

Part time workers are protected from being treated less favorably than a full time counterpart. Any less favourable treatment could result in them pursuing a claim in the Employment Tribunal.

Tribunal claims

Workers who are denied their right to paid annual leave under the Regulations can bring a claim for compensation in the Employment Tribunal.

Generally, such claims must be presented within three months of the date of the breach.

Where an employee is dismissed by an employer for asserting their rights under the Regulations, such dismissal will be automatically unfair and the employee could pursue a claim.

In such cases, the employee does not need to have the usual two years qualifying service to bring an unfair dismissal claim.

Employers must ensure that they have in place relevant agreements covering the holiday year, deduction of excess holiday pay entitlement upon termination and notification of holidays and refusal of holidays, or the default provisions in the regulations will apply.

If there is no relevant agreement on the holiday year, the employer may well be faced with each employee on a different holiday year.

Where current holiday rules operate in any way such as to deny a worker any entitlement under the regulations, the regulations will prevail.

An employer cannot argue that overall its scheme is more beneficial to the worker.

Does your business turn over between £50,000 and £500,000? If so, you are eligible for the new Small Business Grants initiative from SmallBusiness.co.uk. We’re giving away £5,000 every month in a free-to-enter competition. Apply now by clicking here. Good luck!

Further reading on the law surrounding holiday leave and pay:

Comments (248)

Anonymous

Can you advise if the same entitlements appy to staff who are emploted on term time contracts ie within a school, school admin are only paid 39 weeks per year, they are not paid for the 13 week school holidays although the 39 week pay is split over 52 weeks. Teachers on the other hand are paid for their holiday 13 weeks.

Anonymous

Can you advise whether a worker on bank/casual staff (regularly working 36+ hours per week for over two years)has the right to expect paid holiday? My husband has been told that part of his hourly rate is holiday money and that he has to put it aside himself if he wishes to have money when he tkaes a week off. I cannot see that this is fair as he cannot account for the funds separately as they do not show up on his time sheet in this manner. Plus how can they calculate his accrued hours when he works overtime as well?

Anonymous

Thank you for your comments. I have sent your queries to our expert to be answered.

Anonymous

Joyce...this is answered by Louise Barnes, senior employment consultant at Croner.Individuals who are employed under a term-time only agreement are considered as part-time and as such their entitlement to annual leave is calculated on a pro-rata basis. It is common for salary to be paid over 52 weeks and for salary to include an amount to reflect pro-rata holiday entitlement.It is often a requirement of the terms and conditions of employment that the individual takes their holiday during the periods of school holiday and as such this enables the employer to demonstrate that the minimum working time requirement to annual leave are achieved.

Anonymous

Cathy:Where an employer indicates that a worker's hourly rate includes a payment to reflect that person's holiday entitlement this is known as rolled up holiday pay.Rolled up holiday is a contentious area of law and in 2006 there was a European case (Robinson-Steele v RD Retail Services Ltd, Clarke v Frank Staddon Ltd and Caulfield [2006] ECJ C-131/04) which stipulated that it is unlawful to pay rolled up holiday pay as it amounts to a payment in advance and employees should receive pay at the time leave is taken.However, in this judgement the Court recognised that where sums are paid ‘transparently and comprehensibly’ in part-pay, this may allow for, rolled up holiday pay to still be considered as an option for employers but only if:An employer clearly sets out in an individual’s terms and conditions (and those terms are agreed with the worker) that they will pay holiday in addition to the workers basic hourly rate.The allocation of the percentage, or amount, of holiday pay is clearly identified in the contract (if the holiday pay amount is paid as a percentage of the hourly rate the minimum percentage paid must be 12.07 per cent).Holiday pay must be recorded as a separate amount on the pay slip, and,Records of holiday taken should be kept by the employer (this is to ensure that reasonable practical steps are taken to ensure that workers take their holiday before the end of the annual leave year)If the employer abides by the above points and they ensure they pay a minimum of 12.07 per cent in addition to each hour worked then each hour is considered for the purposes of calculating annual leave.

Anonymous

Hi Ben, very useful article and replies - thanks. Can you clarify where the 12.07% figure comes from. I have been paying my employees holiday pay at 9% in addition to their hourly rate as I was advised (several years ago) that this was the correct rate?

Anonymous

Is it legal to pay employees for their holidays without giving them time off?