Holiday leave and pay: The law
Amy Paxton, senior employment consultant at Croner, explains the law surrounding holiday leave and pay.
This article, originally produced for SmallBusiness.co.uk on 13/09/12, was updated on 28/05/14 due to legislatory changes
It’s almost holiday season and with it the usual headaches for employers. The provisions contained within the Working Time Regulations 1998 (The Regulations) relating to holiday entitlement, together with recent case law has seen an increase in confusion on what workers are entitled to.
Those who are genuinely self-employed where the organisation is the individual’s client rather than employer are not covered. However, there have been a number of cases where individuals, who might at first sight, appear to be self-employed (e.g. certain subcontractors), that have been found to be workers since they were contracted to perform work personally.
The right to holidays
The Regulations give workers the right to a minimum of 5.6 weeks’ paid leave per leave year up to a maximum of 28 days. This entitlement also includes public/bank holidays. Employers can also give workers more holiday than the statutory minimum should they wish to do so.
SEE ALSO: Holiday pay for sick workers worries employers
Workers have the right to holiday from their first day of employment. The accrual rate for new employees is given at the rate of one-twelfth of the statutory entitlement, rounded up to the nearest half day, on the first day of each month of the first year.
The holiday year may be fixed by a relevant agreement, (typically a Contract of Employment, a Workforce Agreement or a Collective Agreement with a recognised Trade Union). If not, it runs from the employees’ start date and each subsequent anniversary. Any holiday entitlement from the original 5.6 weeks’ leave must be taken within the holiday year in question otherwise it will be forfeited. There is, however, the possibility to carry over any additional leave (extra holiday leave agreed by the employer over the statutory minimum) from one holiday year to the next, if it is specified in a relevant agreement. Additionally, following the EAT decision in Sood Enterprises v Healy  employees who have been unable to take their annual holiday entitlement because they have been off long term sick, will also be entitled to carry over at least four weeks’ leave from the previous leave year.
If a worker leaves having taken fewer holidays than he or she is entitled to, he or she should be paid in lieu of the untaken holiday. This does not need to be rounded up but cannot be rounded down.
If a worker leaves having taken more than he or she has accrued, a relevant agreement may provide for a deduction from pay in lieu of the excess holiday. In any calculation of holiday entitlement during the first year, all fractions are to be rounded up to the nearest half day, except on termination. Fractions of a day’s holiday at any time apart from in the first year of employment do not have to be rounded up.
Notification of holidays
If a worker wants to take a holiday they should give notice in writing of his or her intention to take any holiday. Under the Regulations the notice required is equivalent to twice the length of time of the holiday requested. If for any reason you are not able to let the worker take the time off you must tell them in writing within a further time period equivalent to the length of time of the holiday request. These notice requirements can be varied or dis-applied by agreement.
You may decide that you want to fix some or all of the holidays. If you do you will need to give notice in writing to each worker, which should be equivalent to twice the length of time of the holiday to be fixed. For example should you intend to operate a Christmas shut down you could notify all employees at the start of the year.
Payment for holidays should be made at the rate of a “weeks’ pay” for each week of holiday taken under the Regulations. Where the worker has normal working hours (hours and pay does not vary week to week) then payment for holidays should be the same rate as worker’s normal pay and calculated on the basis of the worker’s normal hours of work. Normally, overtime pay is not counted in calculating the holiday pay for such workers, unless it is guaranteed by the employer and compulsory under the employee’s contract.
However, in the recent case of Neal v Freightliner, the Birmingham Employment Tribunal held that by virtue of a decision by the Court of Justice of European Union overtime payments should be included for at least the four weeks leave as prescribed by the Working Time Directive. Because this is only a Tribunal decision, it is not binding on other Tribunals. Additionally, the decision has been appealed to the Employment Appeal Tribunal, which is due to be heard on 30 & 31 July 2014.
Pending the outcome of this appeal, employers who do not include overtime payments when calculating statutory holiday pay for those employees with normal working hours may continue with this practice for the time being, at least until the outcome of the appeal is known. However, employers should be aware that they are accepting the risk that employees may challenge this practice at an Employment Tribunal and in some cases may seek arrears of holiday pay stretching back over a number of years. Employers facing such claims should seek legal advice.
For workers who have normal working hours but whose pay varies from week to week (e.g. pieceworkers), a week’s pay is calculated by taking average remuneration over the previous 12 working weeks.
For employees who do not have normal working hours, a week’s pay is calculated by taking average remuneration over the previous 12 working weeks.
When calculating the 12-week average, you must discount any weeks where the employee received no remuneration and will therefore need to consider earlier weeks where the employee did receive remuneration to bring the total to 12.
If there are no normal hours of work or the rate of pay varies, holiday pay is calculated on the basis of the average pay received by the worker in the previous 12 weeks discounting any weeks where there was no remuneration payable. If you decide to offer more days than the statutory minimum, you are free to make contractual provisions in a relevant agreement in relation to holiday pay for holiday entitlement in excess of the minimum 5.6 weeks.
An employer is not permitted to pay in lieu of the statutory minimum holiday entitlement unless the worker is leaving the organisation.
Part time workers have a right to a pro rata proportion of the statutory minimum annual leave entitlement. For example, a part time worker who works three full days per week, will be entitled to take a three- fifths proportion of the 5.6weeks holiday. What this means is that he or she will be entitled to 16.8 days paid holiday per year. There is no requirement to round up entitlements to the nearest full day – although it may be easier to do so for administrative purposes. However, you cannot round the entitlement down to the nearest day.
Part time workers are protected from being treated less favorably than a full time counterpart. Any less favourable treatment could result in them pursuing a claim in the Employment Tribunal.
Workers who are denied their right to paid annual leave under the Regulations can bring a claim for compensation in the Employment Tribunal. Generally, such claims must be presented within three months of the date of the breach.
Where an employee is dismissed by an employer for asserting their rights under the Regulations, such dismissal will be automatically unfair and the employee could pursue a claim. In such cases, the employee does not need to have the usual two years qualifying service to bring an unfair dismissal claim. Employers must ensure that they have in place relevant agreements covering the holiday year, deduction of excess holiday pay entitlement upon termination and notification of holidays and refusal of holidays, or the default provisions in the regulations will apply. If there is no relevant agreement on the holiday year, the employer may well be faced with each employee on a different holiday year. Where current holiday rules operate in any way such as to deny a worker any entitlement under the regulations, the regulations will prevail. An employer cannot argue that overall its scheme is more beneficial to the worker.