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Holiday Pay Updates – Back with a Vengeance


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Some of you will no doubt remember the barrage of holiday pay emails and updates we sent to you during 2015 and early 2016.  After an 18 month hiatus, there has been another ruling in this arena which (almost) sets the position straight.

For those that do not recall (or have repressed) the holiday pay dramas of 2015, there was a flurry of cases on holiday which, in short, appeared to increase the scope of payments that must be included in holiday pay. At the start of 2016 we were certain that compulsory, non-voluntary overtime should be included in holiday pay calculations, as should a value for lost commission (which, of course, cannot be earned during a period of holiday), although no guidance had been provided on how to carry out those calculations. What we were also clear on was that truly voluntary overtime did not need to be taken into account in calculating holiday pay.

The Employment Appeal Tribunal has ruled this week in the case of Dudley Metropolitan Borough Council v Willetts that voluntary overtime does need to be included in holiday pay calculations where the circumstances mean that pay earned for voluntary overtime essentially forms part of a worker’s normal pay. It also confirmed that, in that case, holiday pay should include an amount in respect of on-call payments, and mileage allowances which were taxable as a benefit in kind, where they formed part of a worker’s normal pay.

Voluntary overtime

The decision means that, in contrast to the previous position where many employers did not consider voluntary overtime in calculating holiday pay, now voluntary overtime must be considered where it is if of a sufficient pattern to form part of “normal pay”. This will come down to the circumstances of each case, but the basic rule of thumb will be that the more regular the voluntary overtime, the more likely it is necessary to include it in holiday pay calculations. It is unlikely that you will need to consider truly one-off voluntary overtime hours worked when calculating holiday pay.

The general position

The basic position now is that holiday pay should include an amount in respect of any normal pay which is normally received by workers. That includes:

  • Commission payments
  • Overtime of any sort (whether voluntary, compulsory, or guaranteed)
  • Shift allowances
  • Stand by payments
  • Call out payments
  • Any travel payments which are treated as taxable remuneration (as opposed to reimbursement of expenses).

The position on whether or not bonuses should be included in holiday calculations remains uncertain. It seems likely that productivity or attendance bonuses will be considered part of normal pay, and therefore payable to workers when on holiday. Annual discretionary bonuses, bonuses based on purely company performance, and other bonuses are a different matter – currently there is no requirement that they should be included in holiday pay calculations, but as yet that has not been ruled on by the courts.

So that’s settled then?

For now, the elements listed above need to be included in holiday pay calculations. However, this decision could be appealed (as seems to be the trend in holiday pay cases), and we will have to wait to see if that is the case.

It also remains to be seen whether the Brexit process will affect the current position, which is derived from and based on European Law. It is therefore, in theory, open to the Government to depart from this decision post-Brexit.

There are also matters that are not settled – namely whether bonuses should be included in holiday pay calculations, and, perhaps more crucially, how holiday pay figures should actually be calculated. It is not clear whether they should be calculated with reference to the normal pay in the 12 weeks prior to taking holiday, 12 months prior, or something else. Some commentators have even suggested that the period for calculation should be on a case by case basis, which would, in our view, be wholly unsatisfactory and unworkable. Some employers are using a 12 week average, but it remains to be seen whether that is correct.

The key point to note is also that this ruling (and the previous rulings on this issue) only apply to the 4 weeks / 20 days holiday prescribed by European Law. The other 1.6 weeks / 8 days required by UK law is not affected by these cases. That means that employers can pay “basic pay” (without commission, overtime, allowances etc.) only, for 8 days of holiday.  Needless to say, that makes calculating holiday pay incredibly administratively burdensome.

What do you need to do?

Legally speaking, all workers who take holiday should now, for 20 days of their holiday, receive a payment which includes an element for all the applicable factors listed above. There are various ways suggested by commentators to make those calculations, depending on the particular elements of pay that are to be included, and all of the ways are tricky and labour intensive, and, unfortunately, facts specific. Employers requiring any advice on that should contact the team, and we can help with the various calculation options and which one will be best / most appropriate for a particular scenario.

Practically, it may well be worth considering more generally the arrangements under which your staff are hired and your business is run. Options include:

  • Assessing the way in which you pay your staff; in particular your use of overtime, commission, and call-out pay arrangements;
  • Assessing the manner in which staff hours are set and workloads are managed. A move to annualised hours or guaranteed hours might be more palatable and / or certain;
  • Considering costs cutting measures elsewhere in your business if you cannot afford to absorb the increased holiday pay costs.

Planned carefully, changes could be made to the arrangements with your staff which will enable you to be (relatively) certain as to what your wage bill will be each year (as opposed to a more fluctuating one) and to manage staffing levels appropriately. If you would like to speak with any member of the Employment Team to chat through your options, please call 01603 281153 to arrange that.

Note: The content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any particular circumstance.