If you thought the complexities of payroll were already hard enough, think again because thanks to a case involving voluntary overtime and an amendment to the employment rights regulations, calculating holiday pay is about to become even more complicated.
There are four key areas to explore when looking at how holiday pay should be calculated.
What is a week’s pay defined as?
The Working Time Regulations (SI 1998/1833) give workers the right to a minimum of 5.6 weeks’ paid annual holiday, and this holiday pay is calculated based on two clear elements:
- regulation 13 provides for four weeks annual leave; and
- regulation 13A for the additional 1.6 weeks UK holiday.
The Grey Area
A “week’s pay” can be treated differently for these two areas of holiday pay.
Pay for the first four weeks reflects a series of cases decided both in the UK domestic courts and in the European Court of Justice. But pay for the remaining 1.6 weeks is calculated as determined by the worker’s (ie not just employees) contract of employment.
Basic Pay
Until 2012, employers had taken the view that salaried staff had normal working hours and fixed pay, therefore only their basic pay needed to be paid while they were on holiday. Many employers simply paid employees their basic pay during holiday periods. Common practice was that for salaried staff no adjustment would be necessary.
Case Changes
Since the case of British Airways plc v Williams & Ors [2012] UKSC 43 the UK courts decided that all of the following must also be considered as “normal remuneration”:
- Commission
- Overtime that must be worked if requested by the employer, and even voluntary overtime
- Attendance & Productivity Bonuses
- Guaranteed/contractual overtime
- Payments related to professional or personal status (eg long service),
- Travel-time allowances
Voluntary Overtime
Kate Upcraft explains,
“Bringing us back to the present day, the case of East of England Ambulance Service NHS Trust v Flowers and Ors [2019] EWCA Civ 947 centred on the definition of voluntary overtime. It considered whether this should be included within the definition of “normal remuneration” in the EU Working Time Directive (2003/88/EC) and the 1998 Working Time Regulations (2016 regulations in Northern Ireland).
This is the first time a holiday pay case has reached the Court of Appeal, but such were the financial implications for the NHS, the Ambulance Trust felt it was important to seek clarity.
The Court of Appeal was asked to consider both the paramedics’ contracts in respect to holiday pay and the requirement of the Working Time Directive (WTD).
The judge felt that both the contract and the WTD required all voluntary overtime to be included in holiday pay. Lord Justice Benn dismissed the appeal and ruled that there was no distinction in the two types of overtime and that as both could be paid on a “regular and settled” basis they should be treated as “normal remuneration”.
This reinforced the view taken in Dudley MBC v Willets [2018] ICR 31 where voluntary overtime undertaken once a month was considered to be regular enough to be included in holiday pay.”
Average Over a Year
The Employment Rights Act, s 222 says that once an employee has pay that varies, their holiday pay is calculated based on the average pay over the 12-week period ending with the week immediately preceding the date on which their holiday begins. Note 12 weeks, (not three months, as for monthly paid staff that would be 13 weeks)
As a result of the Employment Rights (Employment Particulars and Paid Annual Leave)(Amendment) Regulations 2018 (SI2018/1378). from 6 April 2020, this 12-week averaging period will be extended (in Great Britain only) to 52 weeks
Precautions You Should Take
- Those responsible for completing payroll should heed advice to collate timesheet and payroll data as far back as April 2018 to ensure compliance with the new regulations.
- It would be prudent to contact your software provider and ascertain what support they will be providing for the calculation of holiday pay from April 2020.
Food for thought if you are responsible for your companies payroll. If you don’t currently outsource, and the thought of new legislation and further calculations is giving you a headache, contact Avanti (08000) 388 799.
We offer a pic ‘n’ mix of services and payroll is just one of them. We’d be happy to help you ensure that you are compliant and protected with up to date software, support and expertise.