November ’22
Holiday pay can be one of the most complex and challenging areas of the payroll sector, particularly after The Supreme Court has upheld the Court of Appeal’s judgement on the Harpur Trust V Brazel* case, where the ruling states that holiday pay for permanent staff, who only work part of the year, such as term time workers, should get a full 5.6 weeks annual leave a year. This is worked out by using the average pay generated in the weeks the casual/part time staff have worked.
Whilst this change in legislation may not affect everyone, it is certainly worth making yourself familiar with this ruling and check that it does not impact on employees who may work either part time or on a zero hours contract with variable or irregular hours paid.
This ruling also affects full time employees who are ‘regularly’ paid other pay elements such as overtime, bonus, and commissions.
All of these pay elements should now be used to form an overview of what the average pay is, over a period of 52 weeks, and in some cases going as far back as 104 weeks.
Once you establish the average pay, it is at that point that you can apply and multiply by the 5.6 method to gain an estimated outcome of what annualised hours would look like for these employee’s holiday entitlement.
FOR EXAMPLE:
An employee is contracted to 40 hours per week at £9.50 per hour and works 8 hours per day, works 40 hours per week, each single week, and has 28 days holiday, which is the statutory minimum required by law per year, which is the equivalent of 5.6 weeks in holidays.
This employees’ holidays would calculate as followed.
Average of 40 hours x 5.6 weeks stat holiday = 224 hours holiday / 8 hours = 28 days available
If this same employee the next year, consistently works 40 hours basic but is working 10 hours of overtime every week, at standard rate of £9.50, then the following holiday entitlement would apply.
Average of 50 hours x 5.6 weeks stat holiday = 280 hours holiday / 8 hours= 35 days available.
Here in this example, we have set the standard day to 8 so we can establish in days how much excess days the individual should be paid to gain the equivalent number of days payable to accommodate the excess hours worked.
But it would still be the same if we started the calculation in hours.
280 annualised holiday entitlement / 28 holidays minimum = 10 hours paid per day for each holiday taken at the set rate of £9.50.
When the employees ‘average week’ has been determined, if it’s higher than the contractual, and depending on your payroll type, something, whether the hours, rate, or days, must shift to accommodate the excess of what should be paid in holidays.
If you think of it in easy terms, if someone consistently does 50 hours per week and it makes up the average basis of the employee’s pay, then it is no longer deemed as ‘fair’ to pay them the 40 hours contractual pay when the employee takes a week of leave. The employee should be paid 50 hours holiday pay in the week they are on leave as opposed to the 40 hours contractual pay, so the employee is not at a financial loss of their usual average pay when taking annual leave.
it is worth checking to see if you are incorporating this additional cost into your employee’s holiday pay when taken. If you are not, then you are no longer operating under the current guidance.
At DT payroll, whilst we have been operating the ’52-week average’ calculations since it was implemented in April 2020 by the Department for Business, Energy & Industrial Strategy (BEIS), we don’t always have visibility of holiday management, as some clients choose to manage this aspect in-house.
If you feel you need to review your holiday management and make sure your employees are being paid the correct holiday pay, please feel free to contact us at DT Payroll.
We would, however, first implore you to check the contractual aspects of your holiday pay wording, and ensure it meets these current legislation changes. You can do this by speaking to your HR department or the Employment Law Specialists you are currently engaged with.
* For more specifics regarding this case, you may find these links useful:
https://croner.co.uk/resources/leave-absence/case-law-update-harpur-trust-v-brazel/
