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Holiday pay claims: what you need to know

Pay and holiday entitlement are amongst the most important things an employer should get right. Your employees rely on consistency. If you haven’t changed or looked at your holiday pay policy for a few years, then now would be the time to review it. You might be paying too little or too much, so make sure you have the facts.

It should be noted that both “workers” and employees have a minimum holiday and holiday pay entitlement, but in this article, we refer to just employees.

Holiday pay cases

There have been many significant court cases (even in the supreme court)1 about employees not being paid enough holiday pay. It’s often brought into consideration whether regular overtime and commission should be accounted for in holiday pay. These types of cases are usually brought as claims for unlawful deduction from wages under the Employment Rights Act 1996.

The intention of the case law appears to be to ensure that workers receive their ‘normal remuneration’ for certain holiday periods. This is so that employees aren’t discouraged from taking their holiday entitlement.

This means that the following would be included in holiday pay for the relevant holiday periods:

  • Guaranteed overtime.
  • Non-guaranteed overtime and voluntary overtime, where this is worked regularly over a sufficient period of time so that it is part of ‘normal’ pay.
  • Commission and incentive bonuses intrinsically linked to performance.
  • Travel time payments.
  • Shift premiums.

We’ll call these items ‘Extra Holiday Pay’.

What is the current holiday pay position?

The holiday pay rules are different for where an employee has (or does not have) ‘normal working hours’ under their contract.

 Working pattern  How a week’s pay is calculated2
 Regular hours and fixed pay (full or part-time).  A worker’s pay for a week
 Shift work with regular hours (full or part-time).  The average number of weekly fixed hours a worker has worked in the previous 52 weeks, at their average hourly rate.
 Irregular hours and part-year work.  A worker’s average pay from the previous 52 weeks (only counting weeks in which they were paid).

 

To work out a week’s pay for someone who’s paid monthly:

  1. Calculate the worker’s average hourly pay for the last month. Do this by dividing the month’s pay by the number of hours worked in the month.
  2. Calculate the weekly pay. Do this by multiplying the average hourly pay by the number of hours worked in a week.

Use the weekly pay calculation for each of the last 52 weeks to work out an average week’s pay.

If the employee has ‘normal working hours’, then:

  • They’re only entitled to the Extra Holiday Pay for the four working weeks’ holiday, which is required under EU law.
  • Their remaining weeks of holiday (which as a minimum would be 1.6 weeks) must be paid at their basic pay or ‘normal working hours’ rate.

Where the employee doesn’t have normal working hours; or their pay varies according to the amount of work done (e.g. pieceworkers) or the time of work (e.g. where pay is dependent on varying shift patterns), then all leave must be paid at their ‘normal’ rate of pay. This includes commission, regular overtime payments and any payments related to length of service.

It’s important you know the details around such an important issue. If you’re not sure, GOV.UK sets out the rules based on different working patterns.

Backdated holiday pay claims

Now that you know what you should be paying your employees, you might be asking yourself; what if I’ve underpaid people and will it come back to haunt me? Have I made unlawful deductions? Before getting too worried, there are some important rules on backdating holiday pay and wages claims you should know about:

  • The limitation period to claim backdated holiday pay for underpaid holiday is three months. This means three months from the last underpayment where there was a series of unbroken underpayments (or deductions).
  • A series of deductions will be broken if there’s a gap of three months or more between deductions. Once this happens, claims for holiday pay deductions made before that gap cannot be claimed for.
  • However, in any event, employees can only backdate their wages claim to include all deductions up to two years (from the date the claim is made), even if the underpaid dates go beyond this.

This principle isn't always straightforward, so you should seek legal advice.

Managing holiday pay underpayment

It’s important to review your current systems and take these steps to manage any future issues regarding holiday pay and employees:

  • Set out clear contracts and working hours for all employees, including any terms surrounding overtime.
  • Make sure you have a business/employee handbook with guidelines and measures in place to ensure all employees are paid fairly.
  • Should an issue arise, make sure your business has secure and robust accounting systems and processes in place. This will enable you to manage and solve any potential pay issues quickly and efficiently.

If you’re concerned about any of the rulings and legislation surrounding holiday pay, or have questions about retrospective holiday payments, contact a Marsh Commercial Risk Management Consultant or seek advice from an employment law expert.

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Sources:

  1. People Management ‘supreme courts landmark holiday pay ruling’ Oct 2023
  2. GOV.UK

The information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.