The law and pitfalls of holiday pay

Emma Saunders sets out what employers need to know about calculating holiday pay

Credit: Gary Burchell/Getty Images

The Working Time Regulations (the regulations) set out the minimum entitlement to paid holiday for all workers as 5.6 weeks, which equates to 28 days per-year for a worker on a five-day working week. However, a worker’s contract may entitle a worker to more generous periods of paid holiday, more generous payment terms or different ways that workers can exercise their holiday rights. 

Employers must take care to comply with both the regulations and, if bestowing a greater holiday entitlement upon the worker, the worker’s contract. To fail to do so is to risk the worker bringing a claim for unlawful deduction of wages under s 23 of the Employment Rights Act 1996 (ERA 1996) in respect of any outstanding holiday pay the worker feels they are owed. 

Such a claim can be brought either in relation to a failure to pay which occurs over a single occasion or over a period of time, which amounts to a series of deductions. Per the Deduction from Wages (Limitation) Regulations 2014, a worker will have two years from the date of the (latest) failure, in which to bring a claim. A worker may separately or additionally bring a claim under reg 30 of the regulations if an employer has refused to grant the worker to annual leave in which they are entitled, which must be brought against the employer within three months of the (latest) failure to pay. 

Should a tribunal rule that an employer has contravened either s 23 or reg 30, the tribunal will make a declaration to that effect and may order the employer to pay such compensation to the worker as it considers just and equitable in all the circumstances. There is not a disclosed limit as to what that amount may be. 

How do we calculate holiday pay? 

The rules on how to calculate a week’s pay are governed by ss 221-224 of ERA 1996, with different rules for those with ‘normal working hours’, and those with ‘abnormal working hours’. For a worker with abnormal working hours, a week’s pay is calculated as an average of all remuneration (including any overtime and commission) earned in the preceding 52 weeks (Reg 16 WTR 1998). No account is taken of any week in which no remuneration was payable. 

For those instead with normal working hours, a week’s pay is calculated with reference to their normal hours of work, including basic salary and any guaranteed overtime, but would not include bonuses, commission, non-guaranteed overtime payments etc. even where overtime was worked regularly. Where that pay varies, then again a week’s pay is calculated by reference to the average the worker was payable over the preceding 12 weeks.

Good practices for employers

Employers should ensure they are calculating statutory holiday pay correctly for workers with normal working hours. 

If you are an employer that offers overtime, commission and allowances, you should review your calculation of holiday pay immediately to ensure it is compliant with current law. You may also wish to: 

  • consider your working practices and the manner in which overtime and commission are offered and arranged;

  • review working patterns and/or contracts, and amend these if necessary;

  • update payroll software to reduce the risk of mistakes/underpayment; and

  • be mindful of limitation periods and what may break a series of deductions.

Emma Saunders is a senior associate at Cripps Pemberton Greenish