Holiday pay: What employers need to know

Clare Gilroy-Scott, partner and employment law specialist at Goodman Derrick LLP, explains the ins and outs of holiday pay for those who work in and own UK tech businesses.

What is holiday pay?

Unfortunately despite many tribunal and court decisions on the topic of holiday pay, there is still uncertainly as to what should be included in holiday pay, for example in terms of commission and bonus payments as well as carry-over entitlements. Employers who do not want to fall foul of the requirements or face large back-dated claims need to tread carefully and consider the following issues.

Who is entitled to paid leave?

Staff categorised as “employees” and “workers” are entitled to 5.6 weeks of paid leave each holiday year. It is important to note that those classed as “self-employed” for tax purposes may still be regarded as “workers” when it comes to their right to paid leave.

Employment law specifies that a worker should not face a financial penalty for taking leave, so holiday pay should correspond to “normal remuneration”, or the normal amount they would be paid if they were working.

What should be included in holiday pay?

In addition to basic pay, the following variable pay should be included when calculating holiday pay:

Commission
Guaranteed overtime
Non-guaranteed overtime (ie where a worker is obliged to work overtime if requested)
Productivity, attendance and performance bonuses

If any of these elements of variable pay are not included, the employee/worker could argue that they face a financial penalty for taking holiday.

Areas of uncertainty

Voluntary overtime
Discretionary, one-off and company performance bonuses

Following the principles above, isolated instances of overtime and/or bonus payments are unlikely to amount to normal pay and these payments should be assessed on a case-by-case basis.

How is holiday pay calculated?

This is the point of most uncertainty. Under the Employment Rights Act where pay is variable, a “week’s pay” is calculated by taking the worker’s average pay over the 12 week “reference” period immediately before the leave. In relation to holiday pay, the courts have declined to make any finding as to whether this reference period is appropriate, but the courts have commented that it should be a “representative” period which reflects normal working.

This may differ considerably from business to business, and even worker to worker. A longer reference period may be more appropriate where variable pay fluctuates from month to month. For example, this would be the case if a bonus is awarded once in a year. In such circumstances, a 12 month reference period would be advisable. Tribunals may now decide this on a case-by-case basis.

Back-dated holiday pay claims

Holiday pay cases in the tribunals have demonstrated that employees can claim for unpaid holiday pay going back further than just unpaid holiday in the current holiday year although the government has introduced legislation capping claims at two years of backdated pay for holiday taken which was unpaid or underpaid.

However in June, the Advocate-General of the European Court delivered his Opinion in a case concerning a UK worker’s holiday pay entitlement and backdated commission-based holiday pay claims going back 13 years.

In a similar manner to the plumbers at Pimlico Plumbers, Uber’s drivers and CitySprint’s couriers, the worker in this case had been incorrectly treated as self-employed and therefore not given paid leave. When his contract was terminated, the worker claimed pay in lieu of holiday which he had not taken throughout his 13 years because of the impact this would have had on his earnings (he was paid on a 100% commission basis).

The Advocate-General expressed the view that a worker who has been denied “paid” leave should not have to take legal action to be paid for holiday taken. He also commented that a worker who was unable to take paid leave should be able to carry it forward or claim a backdated payment for the full 13 years on termination. This case is not subject to the two year cap because this claim did not relate to payment for holiday he had taken. It related to payment for holiday which he had been entitled to take, but did not because it would not have been paid, being a financial penalty.

Relevance in the gig economy

Employers operating in the gig economy could face a large number of such claims, since a worker will no longer risk his job to bring a claim for backdated holiday pay nor have to wait until the end of their engagement before making a claim.