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Could the cost of living crisis provide a catalyst for holiday pay claims?

Written by Lesley Rennie on 2 November 2022

With 93% of adults in Great Britain reporting an increase in their cost of living, every penny counts. People all across the UK, particularly those on low incomes, are searching for ways to make their money stretch further; however, many have already reduced their spending as far as they are able to.

With little else left to cut, employees will be keen to ensure they are at least being paid correctly and, in some cases, this might involve looking for any instances where their employer may have mistakenly underpaid them. For organisations, this could dredge up the issue of holiday pay once more.

Holiday pay has been a hot topic for employers and HR professionals lately thanks to Harpur Trust v Brazel, a landmark case in which the Supreme Court confirmed that pro-rating holiday pay for part-year workers is unlawful. Those who had been pro-rating these workers’ holiday entitlement and pay could now be exposed to underpayment claims.

This could be an easy win for financially-pressed employees, particularly if the case continues to be newsworthy.

And it’s not just part-year workers employers need to worry about. Those who regularly work overtime or receive bonuses, commission or allowances may also seek to argue that they are owed holiday pay because the employer hasn’t included these elements in their holiday pay where they ought to have done so.

With this in mind, employers should be prepared to respond to holiday pay queries from employees and look to identify any potential discrepancies before they are challenged. Forewarned in forearmed.

Recapping the case law: what should holiday pay include?

Workers are entitled to a minimum of 5.6 weeks’ paid holiday per year and must receive their normal remuneration for that holiday time. The case law is clear that the entitlement is to a week’s pay for a week’s leave.

The question is, how should employers define ‘a week’s pay’? Is it just a worker’s basic rate or should it include things such as overtime and commission payments?

In the past few years, case law has helped to provide clarity on this point in relation to the four weeks’ leave stemming from the Working Time Directive (WTD). In 2014, the Employment Appeal Tribunal in Bear Scotland v Fulton held that compulsory non-guaranteed overtime (in other words, overtime which isn’t guaranteed to be provided but is compulsory if the employer requires it) must be included in the calculation of holiday pay for WTD leave.

In 2019, the Court of Appeal in East of England Ambulance Service NHS Trust v Flowers found that voluntary overtime should also be factored into holiday pay calculations for WTD leave if payment for such work is “sufficiently regular and settled” for it to amount to normal remuneration.

Unfortunately, there is little guidance as to how frequently overtime has to be worked before it must form part of holiday pay calculations. This will be fact specific and may vary case by case. However, if overtime is worked to a set pattern, even if just one week out of four, that is likely to be “sufficiently regular” enough to form part of the worker’s normal remuneration, as is a situation where overtime is worked more often than not.

The point is that workers should receive in holiday pay what they would have earned if the period had been worked normally. If workers receive less for holiday periods than if they were working, this will act as a financial disincentive to taking time off, which defeats the purpose of the WTD – rest and relaxation away from work.

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The consequences of a continued focus on holiday pay?

Holiday pay is likely to remain in the news for the foreseeable future with another key case on holidays being heard by the Supreme Court at the end of the year.

In December, the Supreme Court will hear the appeal in Police Service of Northern Ireland V Agnew and will consider whether a gap of more than three months in between payments of incorrect holiday pay will sever any alleged series of unlawful deductions from wages and therefore prevent a worker claiming in respect of historic underpayments. Their decision on this point could have a significant impact for employers. If the Supreme Court finds that a three-month gap is not relevant when considering whether there has been a series of unlawful deductions from wages, this will enable workers to rely upon past underpayments of holiday pay. An employer’s potential financial liability could be considerably expanded if this is the decision reached, although some comfort can be taken from the fact that unlawful deduction from wages claims can generally only go back two years. 

At a time when businesses are also facing rising costs, budgeting is important, as is shielding against unexpected financial blows. Those employers who have so far been unaware of the raft of case law on holiday pay, or who have chosen not to make changes to their holiday pay practices in the hope that no one complains, may soon find that they are on the sharp end of an increasing volume of holiday pay queries by employees who want assurances they have been paid all that they are due. This could be an easy win for financially-pressed employees.

With the recent and continued focus on holiday pay, employers who haven’t already assessed their potential liability, both historical and future, for underpayments of holiday pay would be well advised to do so now so that they can correct any issues going forward, decide how to deal with any previous underpayments, and ensure they are well placed should employees start to raise holiday pay queries.

In doing so, until we have the Supreme Court’s decision in Agnew, employers can’t necessarily assume that a gap of three months or more between incorrect payments will break the series and limit financial exposure. With employees looking to recoup whatever money they can to offset rising costs, failing to address holiday pay discrepancies now could be a costly mistake for businesses to make.

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Cut through holiday pay confusion with support from WorkNest

Calculating holiday pay is notoriously tricky, not only causing a real headache for employers but leaving the door open for underpayment claims. 

If you require practical support getting to grips with the rules, our highly-qualified team of Employment Law specialists can explain the correct approach based on your specific categories of worker and help you to get it right.

Plus, our easy-to-use HR software provides fully automatic holiday entitlement calculations to save you time and keep you compliant.

To discuss how our fixed-fee Employment Law and HR support can help you to manage holiday entitlement and pay efficiently, and adapt to any future employment law changes, call 0345 226 8393 or request your free consultation using the button below.

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