The right to paid holiday arises from European Union law in the Working Time Directive.
Whilst this Directive only allows 4 weeks holiday it's implementation in the UK in the Working Time Regulations 1999 (the WTR) gives a right for all workers to receive 5.6 weeks paid annual holiday.
Holiday pay should be a weekly amount of pay that is equal to a workers normal take home pay.The approach to calculating holiday pay under the WTR has recently been successfully challenged in
employment tribunal cases.
The WTR defines pay as being the amount received for the normal working hours under the workers contract and so excludes all overtime or other payments. Recent cases have decided that this interpretation is not compliant with European law under the Working Time Directive.
Where a worker has normal working hours that do not vary holiday pay will usually be easy to identify as it will be the same as the normal weekly pay.
The calculation is more difficult if hours vary and where pay is made up of a number of items or allowances such as commission, overtime or shift payments.
As a result of recent cases a difficulty over the rate at which statutory holiday is paid may differ for different parts of the statutory leave period (see below).
Variation of hours
If hours vary then the amount of holiday pay is calculated by taking an average of the 12 weeks pay prior to the holiday week.
Different elements in pay
As a result of of recent legal cases the way holiday pay is calculated will change, increasing pay for some workers who receive different components in their pay. The cases decided that UK law is not properly applying European law on holiday pay.
Commission - the case of Lock v British Gas has established that commission payments earned by the worker must be paid as part of holiday poay.
Overtime - the case of Bear Scotland v Fulton has established that guaranteed overtime that the worker is obliged to do should be included in holiday pay calculations. The case also suggests that regular voluntary overtime that is worked should be included in holiday pay calculations because it would be 'normal pay' if received over a long period of time.
Shift payments - the Bear Scotland case indicates that shift payments should be included in holiday pay.
Different rates for statutory holiday pay
A difference between the period of statutory holiday in European (which allows 4 weeks) and UK law (which allows 5.6 weeks) means that the recent cases have only set out entitlement under European law. That means the additional elements to be included in holiday pay (explained above) only apply to the 4 weeks of European leave: employers could therefore lawfully refuse to pay the extra amounts for the additional 1.6 weeks given under UK law.
In most cases employers will not have a specific policy about the way leave is split or taken. However in the Bear Scotland case (see above) it was suggested that the first 4 weeks of leave would the 'enhanced' weeks. This approach may help frustrate claims for long periods of backpay for holidays.
“Rolled up” holiday pay is where employers increase the hourly rate of pay of their workers so that, over the course of a year, a worker receives 52 weeks pay, but over the course of 46.4 weeks
(52 weeks – 5.6 weeks’ leave). This means that the hourly rate of pay must be increased by at least 12.07%, and the worker receives no pay at all when they take holiday; they are
expected to set aside that extra pay to cover holiday periods.
It is still a fairly common practice for employers to pay rolled-up holiday pay, although the European Court of Justice has that it is unlawful because it could discourage people from actually taking their holiday. It is particularly common amongst agency and casual workers, who work irregular hours and for whom it is difficult to calculate holiday pay accrued.
Although courts have said that this is not lawful, they have also said that it is permissible for employers who have paid such rolled up pay to offset any amount paid in ‘rolled up’ holiday pay against money owed for holiday pay when the worker takes their holiday.
The amounts will usually offset each other, with the effect that there is no claim.
If holiday pay is alleged to be rolled up in the hourly rate, check: