In 2014 the Employment Appeals Tribunal ruled that overtime payments should be included in employee holiday pay when calculating ‘normal pay’.

For those who work ‘normal hours’ their holiday pay will be their usual pay. For those who work different hours due to overtime (not voluntary overtime), their holiday pay needs to be calculated in a way that takes this extra money into account.

This led many employers, who had been calculating holiday pay based only on an employee’s basic salary, to fear they were at risk of employees bringing holiday pay claims.

Employers that I speak to today are still concerned about this issue. They are anxious that they are correctly calculating holiday pay and concerned about whether claims could be brought for backdated holiday pay.

Here are the main points to bear in mind:

  • The best way to calculate holiday pay is to base it on an employee’s average rate of pay from the previous 12 weeks unless work is seasonal, in which case the average should be taken from the previous 52 weeks. (Subject to legislative change in April 2020 to 52 weeks.)
  • Remember to include overtime, commission, bonuses, travel time payments and shift premiums.
  • When it comes to bank holidays, you can just pay the basic salary as the rules only apply to the 20 days of holiday required under EU law.
  • The limitation period for bringing claims for underpaid holiday is three months from the last failed payment. Employees can claim for a series of failed payments.
  • Employees can only backdate their claim up to two years from the date the claim is made and only where there is no break in the chain of over three months.
  • A series of deductions will be broken if there is a gap of three months or more between deductions, so claims for deductions made before that gap cannot be claimed for. For example, John could have a failed payment in January but might not have taken leave again until June. This means he cannot claim for January and before.

There are a number of options available to you if you think you’re at risk of a claim which include:

  • Pay the correct holiday pay and pay any historic pay owed – This option is the safest in that the employee will be told that they are getting everything they are entitled to so should have no reason to lodge a tribunal claim. However, this exercise could prove quite costly and, depending on the records and systems in place, could be logistically very difficult, as someone will need to check the holidays and overtime for all affected staff and work out if there was a gap of more than three months.
  • Pay the correct holiday pay and enter into settlement agreements for historic claims – To try to resolve the matter quickly and at the lowest possible cost, an employer could pay the correct holiday pay going forward, while also offering staff a sum in settlement of their historic claims. This could be based on service. For example:
    Up to six months’ service – £100
    Over six months’ service – £150
    12-18 months’ service – £200
    18 months+ – £250
    These figures can be based on a review of the potential claims from staff.
    Employees would need to be given independent legal advice and would be required to sign the settlement to record their agreement.
  • Do nothing and see what happens – This is a high-risk strategy, as it could leave you open to substantial claims.
    You will need to be ready to deal with a claim for unpaid holiday pay by having good records in place and being prepared to correct the pay going forward for the person who made the claim.  Simply paying unpaid holiday when requested will not resolve the matter. The employee will expect the correct pay going forward and, no doubt, other employees will realise they have not received the correct holiday pay, leading to further claims and many disgruntled staff.

For advice about calculating holiday pay, handling holiday pay claims or any employment law matter phone 01782 205000 or email laura.franklin@beswicks.com