Holiday pay: why are employers still getting it wrong?

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Many employers are still not getting their holiday pay calculations right, but are they to blame? Ashleigh Webber looks at recent case law and whether enough is being done to help employers pay staff what they are owed.

Over the past decade, four significant rulings have clouded the issues surrounding the calculations behind holiday pay.

In the first case, Bear Scotland v Fulton, the Employment Appeal Tribunal ruled that any overtime an employee is obliged to perform must be included in holiday pay calculations. Then, in Lock v British Gas in 2016, the Court of Appeal determined that holiday pay must include any results-based commission.

To complicate matters further, the Employment Appeals Tribunal last year said employers should include voluntary overtime shifts in workers’ holiday pay if they were regular enough, while a fourth case – The Harpur Trust v Brazel – clarified that holiday pay should not be pro-rated for staff who work only part of the year.

But despite the profile given to each of the cases, especially Bear Scotland which attracted significant attention in the national media, some employers are still getting their calculations wrong and potentially breaking the law.

According to XpertHR’s 2019 Annual Leave survey, most employers are calculating holiday pay solely on basic pay.

Its survey of 362 organisations found 21% did not include commission payments in their employees’ holiday pay and had no plans to include it.

Only 6.6% included commission in their holiday payments, while 1.7% did not currently include it, but planned to do so.

The remainder (70.7% of employers) answered “not applicable” – it can be assumed that these employers do not pay commission at all, so would not be able to include it in annual leave payments.

“It does continue to be a problem – employers still don’t seem to be following the law,” Unison legal officer Shantha David, who supported Mr Lock in his case against British Gas, tells Personnel Today.

“You would imagine that since Lock, because that was some time ago now, employers would have found some sort of mathematical solution through payroll, but it’s not happening. Employers are struggling with this, but it’s just basic arithmetic.”

David says that, put simply, employers must look at what an employee’s “normal” take-home payment is during the period of time they want to take as holiday, including any bonuses or overtime, and ensure the employee receives this amount.

“There are computer programs for everything: a basic spreadsheet can work out their average pay and commission for their past 12 weeks and divide that by 12 to get what a week’s pay is for when they go on leave. And yes, it’ll mean that it’ll be different every time they go on leave, but I wouldn’t say it’s impossible. I think it needs people to actually care and do it,” David says.

One practical problem faced by employers is the limitations of their payroll software, suggests employment law expert Darren Newman.

“Payroll software tends not to facilitate the sort of calculation of holiday pay that the Working Time Directive requires. Larger employers, in particular, do not find it easy to introduce a system that will calculate holiday pay correctly. That might mean that, periodically, they have to audit who has been paid what and make ‘catch up’ payments as appropriate,” he says.

Currently, the law requires employers to look back 12 weeks and calculate average pay from that, but from 6 April 2020 this reference period will be extended to 52 weeks.

“This might make it a bit easier, but I suspect workers will be paid in arrears for leave at the end of that year. In a way it’s easier to achieve, I suspect,” David says.

No formula

Part of the reason why employers could be excluding commission or overtime payments from holiday pay could be that there is no clear guidance or a formula for how it should be calculated. A number of employers that responded to XpertHR’s survey said they wanted improved official guidance on how to calculate holiday pay, with one manufacturer stating: “It would be helpful if the government would clarify how a calculation should be done when working out holiday pay on overtime. Otherwise it is just open to interpretation and there is no consistency across the industries.”

You would imagine that since Lock, because that was some time ago now, employers would have found some sort of mathematical solution through payroll, but it’s not happening. Employers are struggling with this, but it’s just basic arithmetic” – Shantha David, Unison

David says: “You might ask: is the government helping? There used to be a calculator online but it’s not there anymore, as it was due to be updated. I think it probably fell into the ‘too hard’ category and disappeared. You can’t blame employers for being confused.”

The law itself is also unclear and appears to contradict itself, explains Newman. Although UK employers, for the time being, are expected to comply with EU requirements for holiday pay, the Working Time Regulations 1998 – the UK legislation that brought the EU Working Time Directive into law – says something entirely different to the EU regulations.

“Successive cases at the European Court of Justice have made it clear that the definition of a week’s pay that is used by the Working Time Regulations does not match the requirements of the EU Directive,” he says.

“The UK definition of a week’s pay is very technical and is focused on basic pay. The ECJ has made it clear that anything that a worker normally receives in respect of his or her work should be included – this is wider than commission. Employers should also be including overtime and other allowances that the worker normally receives.

“Frustratingly, the government has not amended the Working Time Regulations so that the definition of a week’s pay matches the requirements of the Directive. Instead it has left the issue to be decided by the case law.

“As a result the Regulations cannot be relied upon in working out a worker’s entitlement. This brings the law into disrepute.”

Simply looking at case law to determine the correct way to calculate holiday pay is impractical for employers. Typing ‘holiday pay calculations’ into the search bar on gov.uk’s employment tribunal decisions site returns more than 16,000 results.

“I doubt that many people wishing to find out information about whether they have been underpaid would find this site useful – not least because, even if they find a relevant case, their circumstances are likely to be different, making comparison difficult,” says Glenn Hayes, an employment lawyer at Irwin Mitchell.

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Unfortunately, because employers operate different commission structures and will calculate pay differently, this leaves the responsibility for monitoring whether staff are being paid correctly with the employees themselves, says David. But are they likely to be aware of what they are entitled to?

“If you’re working overtime and long hours, you as an employee would be hoping that someone is keeping a tab on this. It’s pretty tiring if you’re having to constantly go back and say ‘you’re not paying me properly’,” she says.

Newman adds: “Many workers will not feel it is worth making a fuss about the calculation of their holiday pay – especially if they are worried that they might suffer reprisals as a result. And that’s assuming that they know what they are entitled to.”

Employees don’t often challenge their employer about commission, claims Hayes, “We advise a lot of employers about holiday pay and haven’t seen many commission-type claims being raised, which suggests that workers may not realise they’ve been underpaid. By contrast, awareness around overtime payments is much greater.”

He suggests uncertainty arises when the commission structure itself is complicated. “It’s worth remembering that Mr Lock had commission payments included when he took a holiday. His complaint was that he was disadvantaged by taking holiday because he couldn’t earn commission during that time and this reduced his take home pay in subsequent weeks. That won’t always be the case.”

Enforcement

Should the government and other bodies be doing more to ensure workers are getting what they are entitled to? The minimum wage, for example, is enforced by HM Revenue & Customs, which can impose penalties on employers and, in some cases, prosecute directors who fail to pay employees the wages they are entitled to. But no such significance is given to the enforcement of holiday pay, it appears.

“It would be a good idea for the state to enforce the payment of holiday pay as it enforces the payment of the minimum wage. This was recommended by the Taylor Review and the government has consulted on the idea,” says Newman.

Many workers will not feel it is worth making a fuss about the calculation of their holiday pay – especially if they are worried that they might suffer reprisals as a result” – Darren Newman

“One problem will be that you can’t really increase enforcement without amending the Working Time Regulations themselves so that the law is clear about what is payable and what isn’t. You could hardly have the state enforce a right that the state hasn’t managed to define properly.”

If the government did begin cracking down on holiday pay miscalculations, it could force employers to revisit their commission structures, suggests Hayes.

“Although awareness would undoubtedly help change things, employers may find the economic reality such that they need to change schemes to give lower commissions if an increased holiday payment needs to be made as a result.

“Most [employees] are happy to have a commission scheme without worrying whether it should be reflected in their holiday pay,” he says.

With The Harpur Trust having applied for permission to appeal against the Court of Appeal’s part-year workers decision, and no apparent plans for new guidance on calculations from the government, it seems that confusion in this area could remain for some time.

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