Calculating Holiday Pay

Welcome to the IRIS Holiday Pay Insight page where you can find out all you need to know about calculating holiday pay. After the recent court cases affecting annual leave entitlement and whether overtime should be taken into account, this page is here to answer all of the questions you may have.

Every worker in the United Kingdom is entitled to paid annual leave in addition to the statutory bank holidays that we all receive. We all love a good holiday but recently when it comes to being the one calculating the pay for your employees, the sound of “Holiday Pay” has almost become a nightmare! This insight page has been designed to help you understand Holiday Pay and we have even put together a great free guide on the 4 crucial things you need to know about Holiday Pay.

What are ACAS saying?

ACAS now state that the rules employers and workers follow to calculate holiday pay may need to be updated as a result of the court cases affecting the legislation. They recommend that employers pay their workforce ‘fairly’ in anticipation of the rules surrounding holiday pay changing in the near future.

See what the IRIS Holiday Pay Module can offer me

Due to recent tribunal rulings, the government has assembled a task force to look into how potential changes in how UK companies work out holiday pay for their employees should be implemented. IRIS has therefore developed the IRIS Holiday Pay Module for users of IRIS Payroll Professional and both Earnie Executive and Earnie Business.

The Holiday Pay Module will automatically calculate and pay the 12 week average weekly earnings for holiday pay as part of the payroll run. This easy-to-use process will save you time and reduce errors when calculating employees’ entitlement to enhanced and contractual holiday.

Background to Statutory Holiday Pay

Book yourself onto this free 30-minute webinar which runs twice each month to find out the four crucial things you need to know about how to calculate and manage Holiday Pay for your employees.

In 2014, two employment tribunals; Fulton v Bear Scotland and Lock v British Gas; resulted in two new rulings regarding calculation of holiday pay. They state that overtime and commission should be included in the holiday pay calculation. This document provides an overview of the rulings and explains how they affect holiday pay.

The acts that affect the way that holiday pay is calculated and paid are as follows:

ActEffect on holiday pay/payroll
Employment Rights ActEmployees should be provided with a written statement surrounding the terms and conditions of their employment. There is no guidance surrounding the calculation of holiday pay, other than it should be done consistently. Employees cannot have unlawful deductions of wages i.e. employer taking money from an employee’s wage other than the statutory requirements (this only applies to certain pay elements).
European Working Time DirectiveAll employees throughout Europe are entitled to a minimum of 4 weeks paid annual leave.
UK Working Time RegulationsIn the UK employees are entitled to a minimum 5.6 weeks of paid leave to take into account bank holidays, which account for the additional 1.6 weeks of paid leave.

The four weeks that are associated with the European Working Time Directive is often referred to as statutory leave and cannot be carried over into another holiday year. Employees should be encouraged to take these four weeks as a minimum. The taking of statutory leave is the basis for the appeal raised by Lock in Lock v British Gas.

Free guide on things you must know about calculating holiday pay

Included in this guide is information on the legislation, how that effects holiday pay calculation and also the options that UK companies have when they decide how they want to work out annual leave entitlement.

Download your free guide “the 4 crucial things you must know about holiday pay”.

Free Infographic Holiday Pay: the key facts

We’ve produced a handy infographic which you can download for free which highlights the key facts and figures behind Holiday Pay.

Download your free Holiday Pay infographic.

The Cases

Fulton v Bear Scotland

Bear Scotland are a service provider in the Scottish roads maintenance sector. Fulton argued that not including compulsory overtime in the calculation of holiday pay was an unlawful deduction of wages, as overtime was part of their normal remuneration package (pay). In November 2014, the European Appeal Tribunal (EAT) ruled in favour of Fulton and stipulated that holiday pay should include compulsory overtime in the calculation.

Lock v British Gas

The Lock v British Gas ruling stipulated that commission should be taken into account when calculating annual leave entitlement. The Lock case argued there was a barrier to taking statutory holiday due to reduced pay (lack of commission) during periods of holiday. The European Court of Justice (ECJ) found in Lock’s favour.

In the case of Fulton v Bear Scotland, the particular element of pay that is scrutinised is “Compulsory Overtime”.

Fulton v Bear Scotland

Back in 2015, John Lewis provided one of the highest profile cases of holiday pay non-compliance to date.

It was found that John Lewis had been miscalculating holiday pay for its 69,000 employees for as long as 7 years, meaning that each employee can expect to receive between £62 to £188 in back-dated holiday pay.

The employee-owned company is one of the first to experience the cost of the Employee Appeal Tribunal’s November ruling, which found the UK had been wrongly interpreting European law for some time. It found that regular overtime pay should be taken into account when calculating holiday pay under the European working time directive. Previously, only basic pay counted in the UK.

If you’re looking to get a head-start on the changes to the way holiday pay is calculated for UK companies, take a look at the IRIS Holiday Pay Module. It automatically calculates the amount of holiday pay owed to each of your employees based from their previous 12-weeks’ total earnings, helping your business avoid a similar situation to that of John Lewis.

Source: The Guardian

Interested in the IRIS Holiday Pay Module? Give us a call on 0344 815 5676

Find out more about Holiday Pay