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Holiday pay - what should it include?

With holiday season upon us, many workers are jetting off, but, are they being paid the right amount of holiday pay asks employment lawyer Joanne Wright of law firm Andrew Jackson.

Workers are entitled to be paid their normal remuneration during periods of annual leave. Where hours of work vary each week, holiday pay is calculated using the average pay from the previous 12 weeks. If the worker has normal (fixed) hours per week, holiday pay is based on those fixed hours.

But now, two high profile European cases have put this into doubt. It seems employers should take into account all components of pay that are intrinsically linked to the work carried out. This can include overtime, commission, bonus, call out and standby charges.

Employers will have to wait and see how these decisions are interpreted by the legislature and the UK courts but, with no date in sight for an answer, what can workers and employers do?

Workers who regularly receive additional pay and have fixed hours per week are most likely to challenge the level of holiday pay when it reverts to normal (or basic) remuneration based on the fixed hours per week.

Employers will want to limit their liabilities and their approach in the proceeding months will depend on how risk-adverse they are. Until there is a change in law and/or the courts interpret these decisions, employer’s can:-

do nothing; calculate average pay; or change pay structures.

Employers who do nothing run the risk of the law changing in the worker’s favour and then being stung if changes to holiday pay apply retrospectively - but may save money in the short-term.

If employers choose to start using average pay, they will have to decide on an appropriate period of time over which to calculate pay. It could be 12 weeks as is currently in use but one year was mooted in Europe. However, if the law is changed, by making a payment now, employers may limit how far back workers can claim if it applies retrospectively; any change may not apply retrospectively and it could become an administrative nightmare calculating average pay for the weeks preceding annual leave if employers are not used to doing it.

Alternatively, changes to pay structures eliminating varying components means one rate of pay regardless of the work carried out. The benefit is that holiday pay will be the flat-rate as nothing varies but the downside is this disincentivises workers, particularly in certain industries such as sales where commission forms a big part of pay.

In addition, any changes employers make will be subject to consultation with the workforce and may involve changes to employment contracts and holiday policies.

This was posted in Bdaily's Members' News section by Andrew Jackson solicitors .