We’re getting technical this week, because something big has happened in the world of HR and it’s possible you might not have noticed, because I didn’t until it was brought to my attention yesterday.
The case of Dudley Metropolitan Council v Willets & Others appears to have brought into focus a long-standing legal blur on the topology of holiday and holiday pay.
It has always been established in law that “guaranteed overtime” – that is, overtime that is contractually guaranteed (it’s a pretty rare beast, these days, so if you’ve never seen it, don’t worry) – must also accrue holiday pay. And not long ago, Bear Scotland v Fulton established that mandatory, non-guaranteed overtime (i.e. you may or may not get it, but if it’s there, you gotta do it) must also attract holiday pay. But now Willets et al has established that “voluntary overtime” (we got some; do you want to do it?) must also attract holiday pay.
This is a very big and potentially very expensive deal, as the courts have indicated that claims may be backdated up to two years. But working it out properly is not immediately and intuitively obvious. What follows is based on my own imperfect understanding of the situation and how I intend to address the question. Your mileage may vary. You have been warned.
What’s this “holiday pay” thing?
Well, generally, holiday (planned time off from work) and holiday pay go hand-in-hand. When you’re on holiday, you receive holiday pay. In the vast majority of cases, this simply means that your employer keeps paying you while you’re on holiday.
The law says that you must have at least 5.6 weeks (28 days) per year of paid holiday: that is, you must have that time off from work and be paid for that time. In theory, the rate of pay offered during holiday could be less than the normal rate of pay (hence, “holiday pay”) but in practice this doesn’t work, because paying someone less to be on holiday that they get when they’re not on holiday is seen as an inducement to not take holiday. And because that holiday is a legal right, to try to induce your employees to not take it is against the law.
However, if you are receiving at least your statutory minimum of actual paid time off, any other holiday you earn doesn’t need to take the form of actual time off and can, instead, be paid directly to you: time is money, after all. So the logic follows that giving you money is as good as giving you time.
Thus, we get to the holiday pay earned by those performing (all sorts of) overtime. This can be given back to the earner in the form of time off or in the form of money. But if you give it in the form of time off, it also has to come with the actual opportunity to take that time off. If you award extra holiday for overtime and the employee is unable to take the holiday, they have to be paid it. And as most businesses clocking up lots of overtime don’t have the leeway to let people take loads more time off, a lot of them cut out that step entirely and just move directly to the extra pay. Hence, “holiday pay”.
How do we work out how much to pay?
This is still a little tricky to answer, because although it’s been established that overtime accrues holiday, it has also been established that holiday is accrued against the statutory rate of holiday, not the occupational rate. So if you offer employees, say 25 days’ holiday per year, plus Bank Holidays, that’s about 33 days per year total. But the statutory rate is 5.6 weeks or 28 days total. So additional holiday is only accrued at the rate of the statutory allowance of 5.6 weeks… Or is it?
There is an argument that, because this finding was reached under the auspices of European law, then holiday is, in fact, accrued at the European statutory rate: a rather less generous 4 weeks per year.
Right now, we just don’t know. Ain’t employment law great?
Still, if we assume that an employee is full time and works a contractual 260, 7.5-hour days per year, that’s 1950 hours per year. 28 days (holiday) is the 210 hours per year. So each hour worked earns 0.11 hours of holiday. That’s 6½ minutes, by the way.
From that, you should be able to work out how much additional holiday someone is earning each month and, converting that to their hourly rate of pay, how much holiday pay they might be entitled to.
Putting it into practice
So you really have three options:
- Have them take it as holiday. This is additional holiday, accrued as the year goes along. If they have the chance but don’t use it, it’s lost. If they don’t have the chance to use it, then at the end of the year, it gets paid in a lump. Or, if you’re nice, you might pay any unused additional holiday at the end of the year.
This approach is going to be practical if you have a large-ish workforce working a lot of overtime, as you’ll be able to cover the additional absences and enough overtime will be earned to make it worth taking as holiday. Given they’re working a lot of overtime, they’ll likely be pleased for the break!
- Just pay it. The easiest option is to not allow them to take the extra holiday but just to pay it off, every month, as it’s earned.
- Mix and match. You might, instead, either allow employees to choose their approach, or pay off all extra holiday pay below a certain threshold (such as half a day) but if someone earns enough for it to be worth calling “holiday”, letting them take it.
Either way, you’re going to need to budget accordingly, and rough estimates suggest that impact on overall payroll budgets is going to in the region of 11-12%.