Holiday pay should reflect ‘normal’ remuneration. This is a fairly elastic concept, but it is clear that it goes further than basic pay. To ensure correct payment is made employers should:
1. Conduct an audit
All employers who pay ‘extras’ in addition to basic pay should conduct an audit of employees and pay patterns to assess whether there is underpayment for holidays. The audit should also consider knock-on effects on, for example, pension entitlement or auto-enrolment triggers. Once completed this will enable employers to identify for the future:
- What additional sums should be included when calculating holiday
- Which holidays the additional sums must be paid for
2. Include in the calculation of holiday pay:
- Commission
- Guaranteed and non-guaranteed overtime whenever employees are required to perform overtime if asked
- Allowances linked to personal and professional status such as those based on seniority or professional qualifications
- Incentive bonuses, for example, for productivity, attendance or performance
- Shift allowances and premiums
- Acting up supplements
- Stand-by and emergency call out payments
- Travel and other allowances where these go beyond mere payment for expenses and are treated as taxable remuneration
3. The following need not be included when calculating holiday pay at present:
- Benefits in kind
- Bonuses not linked to performance
- Expenses which only reimburse costs incurred
- One-off bonuses and occasional payments
4. Take care with voluntary overtime
Overtime employers are not obliged to offer and employees are not obliged to perform if asked, remains an area of uncertainty. Our advice at present is that if there is a sufficient degree of frequency and repetition to the overtime, employers should seriously consider making payment in respect of such overtime during holiday.
5. Establish an appropriate reference period
Where there is no regular and settled pattern of overtime or additional payments, an averaging exercise will need to be carried out to establish a weekly rate at which holiday should be paid. Best practice is to assess and adopt a reference period which permits a fair reflection of ‘normal’ remuneration for holiday. This should usually be at least 12 weeks.
6. Consider which hours and premiums must be included
The averaging should not just take in additional hours worked on overtime, but also additional payments made. For example, if five extra hours are worked at time and a half, the five hours should be added at the overtime rate to arrive at the appropriate rate of pay for holiday.
7. Check how many weeks of holiday enhanced payment must be made for
UK workers are entitled to 5.6 weeks holiday per year. This is split into:
- 4 weeks derived from EU law
- 1.6 weeks derived from UK law.
The requirement to include the additional payments referred to above in calculating holiday pay applies only to the EU 4 weeks. The remaining 1.6 weeks can be paid at the basic rate of pay. Usually the 4 week EU holiday will be considered to fall first in a holiday year.
You can download a briefing sheet which offers guidance on calculating holiday pay [doc 217], however, if you would like to discuss any specific issues, please don’t’ hesitate to contact a member of our Employment team.
