The trouble with holidays

Calculating holiday used to be so much easier than it is today. Holiday, or annual leave, first became regulated in 1998 with the introduction of the Working Time Regulations. That allowed employees to have 20 days holiday each year, which included the bank holiday proportion of 8 days. In 2007 the Working Time Regulations were amended to add the 8 bank holidays onto the 20 days, giving everyone 5.6 weeks statutory holiday each year. Therefore, when calculating holiday entitlement when someone leaves or joins an organisation, the calculation must be made on the basis of 5.6 weeks (or 28 days for a full time member of staff). What we have found recently is that so many payroll staff are not aware of this and are calculating holiday entitlement for full time staff on the basis of the 20 days because they do not believe it is necessary to include the bank holidays. Whilst most payroll staff are including a proportion of bank holidays for part time staff, which is correct, they are not doing the same for full time staff.

Where organisations do not recognise bank holidays, such as in the retail or hospitality sectors, full time staff simply add those days to their entitlement to take at a more suitable time of the year. Therefore when calculating holiday upon leaving or joining, it is even more important to include the bank holiday element into the calculation so that every member of staff has their holiday calculated on the basis of 5.6 weeks holiday. Where staff are part-time, their holiday should be calculated on their pro rata element, which must enable them to also take the equivalent of 5.6 weeks holiday per year.

A recent accounting change has meant that companies who have a turnover of over £3m per year will need to show any outstanding holiday entitlement as a liability in their year end accounts. This has prompted many of our clients to change their holiday year back to April to March when before their holiday year was January to December. This change has meant that they are again affected in years where there are two Easter holidays within one holiday year. In these situations ten bank holidays will be taken in that year, leaving only six bank holidays to be taken in the following holiday year. Because the entitlement is to 5.6 weeks annual holiday, those employers who only offer the statutory minimum holiday will be required to provide an extra two days holiday in the following holiday year. If contracted holiday is over and above the statutory minimum of 28 days (for full time staff), and it covers the extra two days, then this will not be an issue.

Averaging Holiday Pay

In December the Lock v British Gas case was upheld at the Employment Appeal Tribunal with regard to the requirement to pay commission to staff whose salary includes commission pay, when they are on holiday. This supports the earlier Fulton v Bear Scotland case where mandatory overtime has also to be included. Although British Gas have been given leave to appeal again, the legal advice we have received is that the requirement to average overtime and commission in holiday pay is here to stay.

We have been liaising with our clients who are affected by either of these issues regarding how they are going to calculate the holiday pay because neither case has provided any guidance on the reference period for the calculation. Some clients are using the recommended 12 week average, which is used for calculating pay and holiday for employees working on zero or flexible hours. The downside of this with overtime is that it may encourage staff to work a lot of extra hours prior to a holiday period to gain even higher pay while they are away. One of our clients has decided to average holiday pay for overtime using the previous 12 months salary prior to the new holiday year commencing. Although this may cost them slightly more in the long term, it does even the payments out across the year and will discourage staff from working a lot of extra hours prior to a holiday. It also saves a significant amount of administration time as the holiday payment element does not have to be calculated for each separate period of holiday. When this practise has been in operation for a whole year we will review it with them to see how it works, but our view at the moment is that it will make life a lot easier for everyone concerned.

Don't forget that the period over which you have to average commission and overtime is only the first 20 days of holiday entitlement (for a full time member of staff). As this is a European ruling the requirement to average only covers the 20 days that the original Working Time Regulations introduced. For many of our clients this too is an administrative headache so they are choosing to include all holiday entitlement in their calculations.

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