Clarkslegal LLP - Solicitors in Reading and London

Legal Updates

Holiday pay survey: 80% of employers taking part may be underpaying holiday pay

04 April 2014 #Employment


In our recent employmentbuddy survey, we asked employers how they calculate holiday pay. First, we asked whether when paying their staff, they pay additional sums to basic pay, in particular overtime, commission and other payments and enhancements such as shift allowance. Then we asked whether those sums are included in the calculation of holiday pay.

It has long been understood that where employees have normal, basic working hours, overtime need not be included in the calculation of holiday. That is how the Working Time Directive has been interpreted in the UK. The same reasoning has been applied to commission and other payments.

However, as explained in our article,  the problem for employers is that in light of some recent important cases where employees have alleged that holiday pay has been underpaid in breach of the Working Time Directive, the correct legal position may not be as has been understood to be the case since 1998. Although the correct position is still unclear and clarification from the courts is awaited, the indications are that overtime, commission and other payments and enhancements may have to be included in the calculation of holiday pay.

Out of all employers surveyed, 20% do not pay overtime, commission or other payments and enhancements. So for those employers, they should not have a problem.

However, the overwhelming majority, 80% of those surveyed, do have a potential problem – if the courts confirm that the Working Time Directive has not been correctly applied in the UK. This is because these employers, although they do pay overtime, commission or payments and enhancements, they do not include one or more of these elements in the calculation of holiday pay.

Of those employers with a potential problem, 80% have a potential problem with 2 or 3 of these elements, although interestingly 25% do calculate average pay over a 12 week reference period prior to the holiday leave being taken. The biggest  potential problem appears to be with overtime. Only 6% of those paying overtime include overtime in the calculation of holiday pay.

We are sharing the results of this survey with the CBI.

What is most worrying is the back pay issue. The Supreme Court clarified in 2009 that, as a matter of UK law, statutory holiday pay can be claimed in an employment tribunal for periods going back for a long period of time as a “series of deductions” of pay. Every time holiday pay is made, any prior deduction is deemed to be repeated. So, if the same error in calculation is made again and again, that gets around the three month limitation period. Hence, these arrears of holiday pay could go back a number of years, potentially going back over the whole of an employee’s employment.

Employers could therefore be subject to a “double whammy” on holiday pay, not because of a change in the law but rather because a change in how it is interpreted by the courts.

What should you do?

  • If you have not completed the survey, it is still not too late. Doing the survey may help your organisation to start to get to grips with the issues. Please contact us if you would like us to discuss the results with you in confidence.
  • Don’t panic. As explained, the legal position is still unclear so it is too early to make fundamental changes to how you calculate holiday pay. 
  • Carry out an audit of how your organisation calculates holiday pay and how your holiday pay clauses are drafted. We can help you do that. Contact our employmentbuddy team on contact@employmentbuddy.com .
  • Find out the scale of the potential problem, if any, you may have in respect of holiday pay arrears and make financial provision for them. That said, undertaking calculations going back over time can be complex and potentially an administrative nightmare.
  • Make your voice heard. Again, we can help you do that.

If you have any comments on the issues raised above, please let us know contact@employmentbuddy.com

Clarkslegal, specialist Employment lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Employment matter please contact Clarkslegal's employment team by email at employmentunit@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.

Read more articles

Contact

Employment team
+44 (0)118 958 5321