Average holiday pay – are you being compliant?

With holiday season now in full swing, payroll specialist Claire Morrall from Cascade HR, pinpoints the key complexities surrounding the recently introduced average holiday pay legislation, before advising how to tackle them.


It has been a busy couple of years in the world of payroll-related legislation. Back in November 2014, there were mixed reactions when the Employment Appeal Tribunal ruled that holiday pay should reflect non-guaranteed overtime. Employees largely welcomed the decision, whilst businesses feared the associated costs of the move and the potential number of back-dated claims. HR and payroll teams on the other hand, were left wondering how they would effectively, efficiently and compliantly handle the process moving forward.

Since that time there have been further developments. High profile cases such as Bear Scotland v Fulton mean that employers can no longer solely consider basic remuneration when calculating how much staff should be paid whilst on holiday. Commission and overtime, plus additional factors such as travel allowances, should also be taken into account.

Things have evolved significantly, and given the recent Brexit decision, it’s possible that further changes will be on the horizon in the not so distant future. One thing’s for sure though – compliance is essential.

Tackling the key complexities associated with average holiday pay calculations:

The advancement of case law

All rulings have been defined by case law, but, with some cases still being appealed, things aren’t set in stone. If another key case goes to court, the landscape could evolve further still, which has left HR and payroll professionals feeling very uncertain.  The key piece of advice here is to ensure compliance with the current guidance, as soon as possible.

The entire business needs to be aware of how calculations are made and why, therefore, if you haven’t yet amended your holiday policy, do it now.

Accuracy is important, so ensure payroll records, timesheets, expenses claims and other commission related documents are up to date.

Agility is becoming increasingly crucial, so your processes, procedures and systems should be audited, assessed for flexibility and refined. This will ensure your organisation doesn’t grind to a halt if the rulings shift again.

Different types of overtime

Average holiday pay calculations relate to both guaranteed and non-guaranteed overtime, but, as yet, there is no definitive case law surrounding voluntary overtime. This in itself creates confusion. However, things are even trickier when companies don’t record the type of overtime offered and the majority of employees probably don’t understand the difference – it’s just called overtime.

It’s therefore important to define and communicate the differences, so that there’s a greater level of acknowledgement moving forward. This sort of information could be included in the policy already recommended above.

 The Working Time Directive

Organisations must remember that average holiday pay calculations relate only to the Working Time Directive’s statutory 20 days, not the 28 days outlined in UK law. Some businesses may decide to extend the calculations to include additional days, of course, but whatever the decision, this needs to be clearly documented and universally understood to ensure a fair, consistent and compliant approach moving forward.

The 12 week reference period
When hours and earnings vary, holiday pay should be based on an average of the individual’s earnings over a 12-week reference period. However, in some industries such as retail, this may be unrepresentative of normal pay. The Advocate General in Lock v British Gas Trading Limited therefore suggested a reference period of 12 months to ensure a good representation of ordinary working patterns. The ECJ went on to conclude that this is a matter to be decided by domestic courts, therefore employers must exercise great caution when choosing the reference period they will use. Once again, this should be outlined in the policy already advised.

HR & payroll must work together
The rulings have an impact on the activity of both HR and payroll. This has the potential to create more administrative pressures, especially in organisations where the two departments operate as distinctly independent functions.

Steps should therefore be taken to ensure HR and payroll teams work more closely together. If processes can be fully integrated and a collaborative approach agreed, this will lighten the load by apportioning responsibilities evenly. It will also reduce the level of data entry and therefore the likelihood of error.

Lack of clear guidance
If HR and payroll teams had been told that they had to do X by a given date, they would. The clarity would guide their decision making moving forward and adjustments would be made accordingly. The lack of clear guidance surrounding this subject, on the other hand, means some businesses are feeling a little lost and others are completely overlooking the need to take any action. However, this is definitely not a situation where ignorance is bliss.

Here are some final key tips:

  • Review annual leave arrangements to ensure all pay factors intrinsically linked to employees’ usual performance of tasks are now calculated within holiday pay.
  • Ensure a clear breakdown of what has been calculated and why, on employees’ payslips.
  • Remember that if an employee’s working hours change throughout the year, their leave entitlement and therefore their average holiday pay calculations should also be adjusted.
  • Review the technology used to manage your payroll. Has it evolved in line with the changes, is it flexible enough to tackle any next-step developments and can it be configured to suit the specific requirements of your business? If it can’t, it’s no longer fit for purpose.
  • Produce regular annual leave analysis reports to monitor the status of holidays taken – be proactive!

Finally, if in any doubt, err on the side of caution. Speak to your systems providers for guidance and, if necessary, seek legal advice regarding compliance for your business. If it feels like a bit of a minefield, that’s understandable, but there are people here to ensure it shouldn’t.

Author: Editorial Team

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