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New Holiday Pay Rules

Government reforms are coming and they’re directly aimed at employment law. In general terms, the idea is to clarify grey areas, close loopholes and improve working arrangements overall.

One area relates to holiday pay and the way in which holiday pay is calculated and the reference period for doing so, i.e. how long a period of time is used for the calculations.

What you need to know

If you employ people who have one or more of the following elements added to their pay, they must now be included in calculating holiday pay:

  • commission
  • incentive, productivity and performance bonuses
  • overtime, both required and voluntary
  • overtime premiums
  • shift allowances and premiums
  • standby payments
  • payments for emergency call-outs
  • travel and other allowances treated as taxable pay
  • payments relating to the “personal and professional status” of workers, e.g. increments based on seniority, length of service or professional qualifications

Reference period

The period of time to be used for calculating holiday pay will be changed to 52 weeks by April 2020. We are therefore recommending that all businesses start using a 52 reference period to calculate holiday pay.

If an employee hasn’t been employed for 52 weeks, then you need to use the full period of time for which they have been employed.

What’s the law saying

“An Employment Appeal Tribunal (EAT) has published its decision in the case of Lock v British Gas, upholding Mr Lock’s claim that his holiday pay should have included results-based commission which made up the majority of his take home pay. In reaching its decision, the EAT rejected British Gas’ arguments that previous holiday pay cases including the widely publicised Bear Scotland case (which related to overtime) had been wrongly decided. This confirms that holiday pay should be calculated to include all elements of normal remuneration for certain workers.”

In practical terms

That means that any employee who only ever receives their basic pay will continue to have holiday pay calculated on that basis.

However, any employee who receives any of the above pay elements will need to have their holiday pay calculated to include an allowance for these pay elements, particularly those that happen regularly like overtime payments or commission payments.

These rules only apply to the four weeks of statutory holiday entitlement. We see though that calculating two sets of holiday pay based on how much holiday someone has had could be a challenge to work out and could potentially result in getting it wrong which has its own level of consequences.

We’re therefore recommending:

  • Using A 52 week reference period to start using the correct timeframe;
  • Applying the holiday pay calculations for all holiday entitlement;
  • Checking and making sure that holiday pay is being calculated correctly in your business and let us know if you need more information.

The government has launched a new holiday entitlement calculator which will at least help you to determine how much holiday an employee is entitled to, access it here






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