Legal Q&A: Holidays and holiday pay

By Stuart Neilson, partner in People Services, McGrigor Donald

Q How should the amount of holiday pay be calculated by an employer?

A This is relatively straightforward for staff who work ‘normal
hours’ and receive an annual salary. Their entitlement to holiday pay is a
‘week’s pay’ in respect of each week of holiday, and is calculated on the basis
of their annual salary divided by 52.

To calculate any entitlement to pay in lieu of a number of days, the
employer should take a percentage of a ‘week’s pay’. For example, for someone working
five days a week, four days accrued holiday pay is 80 per cent of a week’s pay,
while for someone working four days a week, three days accrued holiday pay is
75 per cent of a week’s pay.

For staff who do not have ‘normal working hours’, or whose remuneration
varies with the amount of work done, a ‘week’s pay’ is calculated by reference
to average remuneration over the previous 12 weeks.

For staff in this category, employers should generally include commission
and bonuses in the calculation. However, employers should also be aware that
the mere fact that a worker receives commission does not in itself bring the
worker into this latter category. For a worker who does ‘normal working hours’
and whose remuneration does not vary with the amount of work done, commission
is not included in the calculation.

Q Can employers pay for rolled-up holiday?

A Rolled-up holiday pay is the practice whereby an employer pays an
hourly rate to the worker, and includes an amount in respect of holiday pay
within that hourly rate. Accordingly, a worker might receive an hourly rate of
£7, of which £1 is the holiday pay element. Such a worker would not then
receive any additional holiday pay when they take annual leave.

The Working Time Regulations have had a significant impact upon this
practice. Following the recent decision of the Scottish Court of Session in MPB
Structures Limited v Munro, even where employers and the worker have agreed a
rolled-up holiday pay arrangement, the employer will still remain liable to pay
a lump sum holiday payment when the worker takes annual leave.

In addition, the employer cannot offset the amount of accrued rolled-up
holiday pay against that lump sum payment. Plus, the holiday pay itself will be
calculated on the total hourly rate (in our example, £7 an hour) rather than
the basic amount.

Unless and until MPB Structures is overruled, employers are strongly advised
to abandon all rolled-up holiday pay arrangements.

Q When does entitlement to holiday pay accrue?

A It is now established that entitlement to holidays will accrue from
day one of the worker’s engagement. Holiday pay will also accrue during periods
of absence due to ill health. Indeed, even where workers are absent throughout
the entire holiday year because of ill health, they will still be entitled to
take paid annual leave.

The statutory right to holidays will accrue during ordinary maternity leave,
any period of additional maternity leave and during paternity leave. Where a
notice period is worked out, they will accrue holiday pay during that notice

Q What rights do workers have to public holidays?

A In the absence of anything stipulated in the contract of
employment, the majority of staff do not have a legal right to any public or
bank holidays. Public or bank holidays are included within their statutory
entitlement of 20 working days’ holiday. Workers only have a legal right to
take public holidays or bank holidays where that is stipulated in the contract,
or in the limited case of certain bank employees.

Under the Part Time Workers (Prevention of Less Favourable Treatment)
Regulations 2000, part-time workers may be entitled (if their full-time
colleagues have a contractual right to public holidays) to an equivalent
pro-rata entitlement, even where they do not normally work on a Monday.

* The advice provided above is based upon the statutory rights provided
in the Working Time Regulations 1998.
Employers should also consider the provisions of any contract of employment
which may enhance, but not derogate, from these rights.

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