Holiday Pay – ten things you need to know

Holiday pay is one of the most litigated areas of employment law — and one where many employers are still getting the calculation wrong. Here are ten things every employer and employee needs to know.

1. A ‘health and safety’ matter

The statutory entitlement to paid annual leave is found in the Working Time Regulations 1998, which in turn implemented the EU Working Time Directive 93/104/EC – now retained in UK law as the Working Time Regulations 1998, following the UK’s departure from the EU.  The regulations treat working time as a health and safety matter and impose 2 limits (both enforceable by the Health & Safety Executive):

• The 48 hour working week and limitations on night shift working
• The right to paid annual leave, and
• 3 other rights relating to daily and weekly rest and rest breaks during the working day

2. ‘Workers’ are entitled to paid holiday

The Working Time Regulations give rights to ‘workers’ rather than ’employees’. This means that a broader section of the working population is entitled to holiday pay under the regulations. In addition to those employed under a contract of employment, use of the term ‘worker’ extends the rights to those undertaking “to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual.”.

This would include, for example, agency workers, and probably also those carrying out work such as takeaway delivery or taxi driving in what is commonly referred to as the “gig economy”. Although those who are genuinely self-employed will not be entitled to ‘holiday pay’ under the Regulations, you should be aware that the rights extend more widely then just to employees.

3. There is no ‘qualifying service’ for annual leave and holiday pay

The entitlement to holiday pay starts immediately on commencing work. However, paid annual leave accruespro rataas someone works during the first year.

4. 5.6 weeks’ paid annual leave

The Working Time Regulations 1998 provide for an entitlement of 5.6 weeks’ paid annual leave – an additional 1.6 weeks beyond that provided for in the Directive.. The entitlement to annual leave for an individual worker is calculated by multiplying the number of days in their normal working week by 5.6, and then rounding up if necessary to the nearest half day.

5. ‘Holiday Pay’ is calculated with reference to a number of factors

There have been a number of cases relating to the calculation of holiday pay, and it is worth regularly reviewing your holiday pay calculations to make sure you are incorporating everything that should be included. Obviously, basic pay is included.

In addition, holiday pay should include: – Any guaranteed and non-guaranteed but regular overtime payments, and overtime payments when the employee has no option but to work, such as shift overruns for ambulance staff. – Commission, including results-based commission following Lock v British Gas, shift premiums and bonuses – Payments made for time spent travelling to and from work as part of normal pay.

To make matters that little bit more complicated, some factors, such as guaranteed/ compulsory overtime will apply to the whole 5.6 weeks’ entitlement, while other factors will only apply to the 4 week entitlement under the Directive. It may be administratively too difficult to distinguish between calculations which relate to the entirety of holiday pay and those which only relate to the 4 weeks provided for in the Directive – in which case there is nothing to stop an employer including all these factors in the calculations.

6. Voluntary overtime is a factor

Subsequent Employment Tribunal decisions and the Northern Ireland Court of Appeal have confirmed that where there is a settled and regular pattern of voluntary overtime, this should be included in holiday pay calculations. Employers should audit their payroll to ensure settled overtime patterns are reflected.

7. Sick leave makes no difference

Holiday pay (and annual leave) continues to accrue while an employee is on sick leave. An employee can carry over accrued sick leave, or designate a period during sick leave when they are effectively taking ‘annual leave’ and can be paid accordingly.

8. Calculating holiday pay where there are no fixed hours or work

Workers on non-standard working arrangements such as zero hours contracts are still entitled to holiday and holiday pay. Their holiday pay is calculated by reference to pay received over the preceding 52-week period — a change introduced in April 2020. Weeks where no pay was received are excluded from the calculation. If this 52 week period includes weeks where no hours were worked (and therefore no pay received), these weeks should be ignored and the calculation should include the most recent weeks where pay was received.

9. Contracting out is not an option

UK workers must take their 5.6 weeks leave and be paid for it. There is no option to receive a payment in lieu. If the contractual leave entitlement is more generous, it is up to the terms of the contract whether any excess leave can be paid for in lieu.

10. Payment on termination of employment

Holiday pay that has accrued but has not yet been taken when an employee’s employment terminates must be paid up in full. Holiday pay is a complex area of employment law, both for employers and for employees. As an employer, if you’re struggling with a specific issue, or feel unclear about the treatment of holiday pay within your organisation, it’s worth taking expert advice sooner rather than later.

For a detailed analysis of the Bear Scotland judgment and overtime calculations, see our post on holiday pay and overtime.

For advice on holiday pay disputes, see our contact our employee legal advice page.