Are you paying your workers the right amount of holiday pay?
A recent ruling by an Employment Appeal Tribunal is set to cause many businesses a headache. Quite an expensive headache, at that.
Simply put, it means that certain businesses will find themselves paying their workers additional holiday pay. Moreover, if they’re not already paying that additional holiday pay right now, they’re leaving themselves open to claims for back pay—claims that will almost certainly be valid.
Worse, while the broad thrust of the Employment Appeal Tribunal ruling is clear, there are still troubling ambiguities in how best to comply with the ruling. At minimum, what used to be a very straightforward calculation now looks set to become much more complicated affair, and require businesses to maintain additional records.
What’s it all about? Let’s take a look.
The starting point is the European Union’s Working Time Directive, which entitles workers to a minimum of four weeks’ paid holiday a year.
The Directive is enshrined in UK law under the Working Time Regulations, which are a little more generous: UK workers who work five days a week have the minimum European entitlement of four weeks of paid holiday, plus an additional 1.6 weeks' paid holiday each year which represents the eight bank holidays we usually have in the UK each year —a total of 5.6 weeks, or 28 days.
And the Directive is quite explicit: when on holiday, workers should receive their normal pay.
Employment Appeal Tribunal case law
But what, exactly, is ‘normal’? For years, the presumption has been that ‘normal’ means basic pay—that is, payment before any overtime, or commission.
Because, after all, when workers are on holiday, they aren’t earning any commission, and they aren’t working any overtime.
But a series of recent Employment Appeal Tribunal rulings has thrown that cosy assumption into disarray. Simply put, the upshot of cases such as Bear Scotland vs. Fulton, Hertel vs. Woods, and Amec vs. Law is that these overtime and commission payments are part of normal pay, at least in certain circumstances.
That’s right: if you have workers who are regularly paid overtime or commission, then those overtime and commission payments should be regarded as part of their normal pay. And so should be reflected in their holiday pay.
So what does all this mean for businesses?
At its simplest, if you have workers who are being paid regular overtime and commission payments, then it’s important to start reflecting those payments in their holiday pay.
For each worker, an average level of overtime must be calculated, and an average level of commission, and holiday pay calculated so as to include these average payments.
There’s nothing to be gained by deferring this, because payments can be backdated—although, from July 1st 2015, only as far back as two years.
So far, so simple. Or at least, understandable. But the devil, as always, is in the detail.
For instance, what is actually meant by ‘overtime’? The Employment Appeal Tribunal identified three different kinds of overtime, some of which falls within the ruling, some of which doesn’t. The key determinant is how regular the overtime and commission payments are.
Basically, if the worker regularly works overtime, and has a regular expectation of receiving overtime or commission payments, then the ruling affects them.
But when calculating the average level of overtime and commission payments, over what period should the average be worked out?
The Employment Appeal Tribunal didn’t say—although elsewhere, in another context, the Working Time Directive talks about a 12-week reference period. So using that 12-week period would at least be consistent.
Likewise, it’s important to remember that the case law we’re talking about is in relation to European law—that is, the Working Time Directive, and its four-week holiday entitlement.
Put another way, the Employment Appeal Tribunal has specified how holiday pay should be calculated for those four weeks stipulated by the Directive. But it has said nothing about the additional eight days—or 1.6 weeks—for which full time British workers also receive holiday pay.
So in theory, that 1.6 weeks of paid holiday could be paid on the ‘old’ basis—that is, without reflecting overtime and commission payments.
What to make of it all?
It is, in short, all a little unclear. And for many employers, that lack of clarity will be troubling, as it leaves them open to the prospect of aggrieved workers making backdated claims for unpaid holiday pay.
Our view, at The Legal Director, is that this lack of clarity will only be resolved by future case law. Meaning that for the foreseeable future, employers must simply live with the present ambiguity.
That said, they’ll naturally want to minimise the risks that they face.
Here at The Legal Director, we specialise in providing clear cut legal advice in business friendly language. Providing it affordably, to suit a business’s own needs and workloads. And providing it in a range of offerings stretching from a fixed fee monthly retainer for telephone advice, to your own part time legal director, working alongside your own board of directors.
To find out more get in touch or call James Mallender at any time on 07968 089 971.
Posted Wednesday, July 15th, 2015 by Warren RylandTweet
Other Articles In This Category
- Did you negotiate your last loan agreement - or just sign on the dotted line?
For businesses wanting to grow or invest, external finance can be an attractive option: access to the funds that they need, without equity dilution or... read more
2nd of November 2017 by Warren Ryland
- Protecting the value of your newly-acquired businesses can be a challenge
Buying a business is exhilarating. Hard work, to be sure - but undeniably exciting, and with a rich sense of the opportunities that lie ahead. So perhaps... read more
2nd of October 2017 by Warren Ryland
- GDPR. The clock is ticking: a tough new take on data protection is fast approaching
With effect from 25 May 2018—in other words, less than a year away—your business is exposed to a new regulatory regime backed by hefty fines. And by... read more
6th of September 2017 by Warren Ryland
- Persons of Significant Control: important changes to reporting requirements
It’s barely a year since the introduction of the PSC regime - and already, the compliance requirement has been tightened. And at a time when many businesses... read more
23rd of June 2017 by Warren Ryland
- Avoiding conflict when forming a business: probing questions for potential partners
Every year, several hundred thousand new businesses are created. In 2015, according to the Office for National Statistics, the total was 383,000—the highest... read more
28th of April 2017 by Warren Ryland
- Is your business at risk from the Uber decision? Why your self-employed contractors could really be employees
Fuelled by companies such as ride-hailing business Uber and personal courier firm Deliveroo, the so-called ‘gig economy’ is on the rise. So much so,... read more
12th of January 2017 by Warren Ryland
- The Legal Director - Commended for Innovation in the FT Innovative European Lawyers awards
Law firm The Legal Director (TLD) has been commended in the FT Innovative European Lawyers awards, which were announced at the beginning of this month. TLD ranked... read more
28th of October 2016 by Warren Ryland
- Debt versus Equity - Financing for SMEs
The need for additional finance is often the price of success for small to medium-sized enterprises (SMEs) that are looking to grow. The question that faces the... read more
14th of October 2016 by Warren Ryland
- The deceptive complexity of the Modern Slavery Act
At the end of July, Prime Minister Theresa May launched a cabinet-level government taskforce to eradicate modern slavery in the UK. It was, she said, “one of... read more
31st of August 2016 by Warren Ryland
- How our clients will benefit from the Bar Council's escrow account
Outside the narrow realms of consumer technology, there’s often an inevitable trade-off between cost and quality. In other words, you can have something at... read more
7th of July 2016 by Warren Ryland
- As the net starts to close, the Bribery Act prosecutions begin
As we have written before, the Bribery Act 2010 is a law with undoubted teeth. Fines are potentially unlimited, and custodial sentences can be up to ten... read more
1st of May 2016 by Warren Ryland
- New rules on shareholder identification are now in force
New rules on shareholder identification are now in force - and yet many businesses aren’t aware of them. Does your business have corporate or nominee... read more
12th of April 2016 by Warren Ryland
- First SRA-regulated law firm signs up to Bar Council's escrow account
PRESS RELEASE: The Legal Director has become the first law firm regulated by the Solicitors Regulation Authority (SRA) to sign up to the Bar Council’s... read more
31st of March 2016 by Warren Ryland
- Trade marks: the 3 biggest mistakes to avoid
Wander around a supermarket, or browse the advertisements in newspapers and magazines, and you’ll see trade marks everywhere. And it’s likely, too, that... read more
29th of February 2016 by Warren Ryland
- Avoiding flexible working's hidden pitfalls
You don’t have to look too far to see that traditional modes of employment are increasingly giving way to more flexible working arrangements. Returnee... read more
9th of November 2015 by Warren Ryland
- The Bribery Act 2010: are you running a risk of breaking the law?
To see the difficulties that businesses can get into through bribery - or even allegations of bribery - look no further than the reputational damage suffered... read more
11th of June 2015 by Warren Ryland
- It's official: "Lawyers are not cost-effective"
Imagine, for a moment, that when faced with a serious illness, significant numbers of people took no action. And of those who did take action, around... read more
20th of January 2015 by Warren Ryland
- Could a Shareholder Agreement save your business?
Here at The Legal Director, we’ve recently come across a business where the two co-founders have fallen out -- one is now leaving, in order to set up on his... read more
1st of December 2014 by Warren Ryland
- The high-fee culture that's hobbling British business
Another week, and yet another critical item in the press on the cost of obtaining corporate legal advice. And to be sure, it’s certainly a fairly open goal at... read more
11th of November 2014 by Warren Ryland
- Is crowdfunding the answer to your business's financing challenge?
As the credit crunch and ensuing recession of 2008 began to bite, lending to businesses dried up. To their shock, even long-established, profitable businesses... read more
2nd of September 2014 by Warren Ryland
- Complying with the Data Protection Act: 3 business bear-traps awaiting the unwary
Visit the website of the Information Commissioner’s Office, and there’s an interesting section entitled ‘Enforcement’. In it, the... read more
1st of September 2014 by Warren Ryland
- What might a Legal Audit reveal about your business?
When we start working with a business we assess their existing legal arrangements to determine how these can be improved and aligned with commercial objectives. We... read more
9th of July 2014 by Warren Ryland