The scope of payment that employees are entitled to when on holiday has expanded greatly over recent years. With the summer holidays fast approaching, it is important to be aware of these changes and the potential implications for your business.
As well as being a statutory requirement, holidays can be important for maintaining employee morale, and therefore offering a transparent and fair holiday policy is one of the keys to making your business both an attractive and friendly place to work.
With this is mind, here are some of the key points of the law relating to holiday pay, and their potential implications.
How much holiday pay are employees entitled to?
Holiday pay rights stem from EU law, under which employees are entitled to 4 weeks of holidays per year. UK law adds an additional 1.6 weeks of holiday that employees are entitled to. For a full time employee this will translate to 28 days per year.
How is statutory holiday pay calculated for employees?
In EU law it has been found that holiday pay should not be limited to basic salary but should correspond to “normal remuneration”, this could potentially include any overtime, commission or other payments which form part of “normal pay.”
Under UK law, (for the 1.6 weeks of additional holiday mentioned above) if an employee has normal working hours then holiday pay is calculated in reference to these, and therefore bonuses, overtime or allowances would usually be disregarded. If an employee has no normal working hours, for example an employee under a zero hours contract, then holiday pay is to be calculated as an average of all remuneration received in the previous 12 week, which includes bonuses, overtime and commission.
When should overtime be included in holiday pay?
If overtime is compulsory, then this is covered in “normal working hours” and is therefore to be included in the 5.6 weeks of holiday pay granted under UK law. If overtime is voluntary then the position is less clear, however it is possible that a tribunal will interpret voluntary overtime to form part of “normal remuneration”, if a settled pattern has developed over time to justify this being labelled as “normal pay”. Please follow this link for more information: http://www2.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2016/04/26/regular-voluntary-overtime-should-be-considered-normal-when-calculating-holiday-pay-judge-rules.aspx.
When should commission be included?
Results based commission must be factored into holiday payments for the 4 weeks of annual leave required under EU law however there is no requirement to do this for the 1.6 weeks of annual leave provided under UK law.
When should work based travel be included?
Payments for travel to work may need to be included into holiday pay if they form part of a workers normal pay.
When can employees make retrospective claims for holiday pay?
If holiday pay has not been correctly given then it can be claimed in an Employment tribunal through an unlawful deduction of wages claim. However following the Deduction from Wages (Limitation) Regulations 2014 there is a cap of two years on retrospective unlawful deduction of wages claims, which includes claims for holiday pay, on any claims presented on or after 1 July 2015.
Will Brexit have any impact on holiday pay rights?
While much of the current case law in relation to holiday pay is found in EU law, rights relating to holiday pay are unlikely to undergo widespread change when the UK leaves the EU. This is particularly the case because UK law actually goes above and beyond EU law by providing an additional 1.6 weeks of holiday.
Could an unlimited holiday policy work for my company?
Unlimited holiday policies have been mentioned a lot in the press recently, with companies such as Netflix and Virgin amongst those who have decided to scrap traditional holiday arrangements. The reasoning is that as their employees are expected to check their email when not at work, if strict working hours no longer apply, then why should strict annual leave policies?
An unlimited holiday policy relies on staff being responsible with their holiday taking, and only doing so when they feel it will not be detrimental to the company.
Whilst companies operating unlimited holiday policies have reported beneficial effects to staff morale and productivity (Netflix have had an unlimited holiday policy since 2004, over which time it’s grown its’ market cap to over $51 Billion), this is not a structure which will work for every business and it is important to be aware of potential risks.
For example, if your company relies on key client relationships, and staff are not able to maintain these due to large amounts of annual leave this could be detrimental to your business. Furthermore, on the other end of the scale, employees may not take enough annual leave to comply with UK and EU minimum annual leave regulations.
It is therefore clear that giving employees this level of freedom only works in businesses where the culture is already collaborative and output focused, and there are high levels of trust with staff. Whilst offering unlimited holidays may appear to be a good way to make a business seem forward-thinking, and an attractive place to work, it is not a step which should be taken without first making sure that the practical difficulties of such a policy can be overcome. As part of this it is important to make sure the correct infrastructure in place to support such a policy. For example, there should be processes for requesting holiday so that all the staff in the company are not absent at once, and there should be performance management procedures in case an employee’s performance drops as a result of unlimited holidays.
Thank you for reading this blog written by our employment intern Alistair.
If you would like to discuss holiday pay or any other employment or HR related issue, please contact Hannah and Katie on 0845 345 5004 or fill out our online contact form.