How to calculate holiday pay and overtime
With the Easter holidays not far away, many individuals will be looking at taking their first period of holiday. Calculating the amount of holiday pay an employee or worker should receive seems, on the face of it, a fairly straightforward process, right?
However, a number of court decisions over the past few years have changed the legal landscape. Employers must now consider a range of additional circumstances when calculating holiday pay; in particular, overtime.
General entitlement to annual leave
All workers are entitled to annual leave which begins to accrue as a ‘day one’ right from the start of their employment.
In accordance with the Working Time Regulations 1998 (WTR), all workers are entitled to a minimum of 5.6 weeks of holiday leave a year (although some contracts may provide a more generous amount). This equates to 28 days of leave per year for someone who works a five-day week. Part-time workers are entitled to the same amount of holiday (pro rota) as full-time colleagues.
There is no legal right to paid public holidays, but the worker’s contract should state if they are to be paid for these holidays. If paid, they can be counted as part of the statutory 5.6 weeks of holiday, but employers can provide them in addition, if they so choose. Of these 5.6 weeks, 20 days are based on European law, whilst the remaining 8 are under UK law.
A week of holiday leave is worked out as the number of days the worker usually works per week, e.g. a full-time worker working 5 days a week will get:
5 days x 5.6 weeks = 28 days annual leave
If they work 3 days a week, 5.6 weeks of annual leave will entitle them to 16.8 days off. However, if they work a 6 day week, the maximum statutory entitlement will remain 28 days and not 33.6 as it may be assumed (unless their contract specifies otherwise).
The WTR's set a legal requirement for all annual leave to be paid at the same rate as working time: for example, one week’s pay for one week’s holiday. The law gives guidelines on how a week’s pay is worked out, and recent case law has further developed the holiday pay calculation.
Calculating holiday pay
It is a statutory requirement that employees receive ‘normal pay’ for time taken as annual leave. Normal pay means the remuneration they usually receive for a period of work of the same length as a period of annual leave.
For a worker who has set working hours which stay the same each week, then a week’s pay is the remuneration he receives for a week of work.
However, workers who do not have a set working time (i.e. because they perhaps work shift patterns that result in in them working a different number hours each week), accordingly do not have a set ‘normal week’s pay’. In this situation their holiday pay is currently* calculated in the following way: their average weekly hours over the previous 12 weeks are multiplied by their average hourly pay for that period to give a week’s holiday pay.
If the worker does not have normal working hours and their pay differs from week to week, then a week’s pay for purposes of holiday pay is the average pay received per week for the 12 weeks immediately before the day the holiday starts. This means that on each occasion the worker takes time off, their pay has to be calculated using a new pay reference period. The result of this is that the worker may be due a different amount of pay for different periods of annual leave.
*With effect from 6 April 2020, changes to the WTR's means that the reference period for determining an average week's pay (for holiday pay purposes) will increase from 12 weeks to 52 weeks, or if the worker has been employed for less than 52 weeks, the number of complete weeks for which the worker has been employed.
Impact of overtime on holiday pay calculations
Although calculating holiday pay may already seem complicated, it is impacted by aspects other than just number of hours worked. ‘Overtime’ hours will also affect it.
There are three different types of overtime:
1. Guaranteed overtime: where the employer is obliged to offer the extra hours and the worker is obliged to accept them.
2. Non-guaranteed overtime: where the employer is not obliged to offer it but when they do, the worker is obliged to accept it, and
3. Voluntary overtime: where there is no obligation on either the employer or the worker.
Following case law developments, it is now very clear that regular overtime payments must be included by employers when calculating holiday pay, irrespective of the type of overtime being worked. Failure to do so means that they run the risk of an “unlawful deduction from wages” claim against them succeeding.
As an employer, what should I do now when calculating my workers holiday pay?
It is important that you set time aside now to audit your holiday pay calculations for the following reasons:
workers will have claims for unlawful deductions of wages in the employment tribunal if their holiday pay has been incorrectly calculated and can claim for 2 years’ back pay.
if a worker becomes aware of their non-compliance it may lead to a group claim by all staff which could be costly and disruptive, or
should you be considering selling your business you may have to give onerous indemnity protection to the purchaser and/or allow the purchaser to retain part of the purchase price to cover the risk of such claims.
If you have any questions or queries arising out of the above information then please do not hesitate to contact one of the employment team who will be happy to assist.
If you have any questions, please do not hesitate to get in touch with a member of our Employment Law Team