Holiday pay miscalculation – your potential liability

What has happened?
The accepted payroll practice in the UK for workers who work normal working hours (NWH’s) is to calculate holiday pay by reference to basic pay and average overtime pay, but only if the overtime is both obligatory and guaranteed.

Excluded from the holiday pay calculation for those with NWH’s is remuneration that is made up of voluntary overtime, shift premiums (unsocial hours/night shifts), allowances (attendance/geographical), status payments (acting up/shift or team leader allowance), emergency call out payments and commission payments.

However, a number of recent Employment Tribunal decisions and an ECJ decision (in relation to commission payments), has thrown the issue of the correct manner in which to calculate holiday pay into a state of uncertainty.

The Employment Tribunal decisions are subject to appeal and are due to be heard at the end of July. It is highly likely that the UK Government will intervene and refer the cases to the ECJ.

There is a widespread belief amongst employment lawyers that the courts will continue to adopt an expansionist approach and seek to include in the holiday pay calculation variable elements of remuneration which are linked intrinsically to the performance of the tasks that the worker is required to carry out under the contract.

What does this mean for me?
For employers, the issue of rectifying the miscalculation going forwards is going to come as an additional and unforeseen financial cost.

Moreover, there is the scope for employees to “claw back” as far back as 1998 any shortfall in holiday pay.

Depending on the number of workers you engage these payments could run into millions of pounds.

What should I do about this?
1. You should look into your current payroll practice and determine whether you are legally compliant. The overwhelming majority of employers will not be legally compliant.

2. If this is the case then as a business you need to make provision and accruals for significant back pay and increased holiday pay going forwards which takes into account variable elements of remuneration when calculating holiday pay. Any back payments are also likely to attract the attention of HMRC in relation to tax and NI and late payment interest penalties.

3. Consider the strategy you are going to take should workers/Trade Unions lodge individual or collective grievances.

4.  Consider the strategy you are going to take should you receive a Tribunal claim.

5. Consider whether you can minimise your financial exposure.

6. Consider whether your current payroll systems are capable of calculating holiday pay taking into account variable remuneration.

What should I not do?
1. Make payment of any shortfall and introduce a new method of calculating holiday pay.

2. Communicate the findings of any exposure internally without seeking to maintain legal advice privilege.

3. Do nothing and wait and see what happens.

How can I minimise my financial exposure?
1. It may be possible to engineer a break in the last in a series of holiday pay shortfalls so that the worker then has 3 months to make a claim for historical back pay from the point that the break takes place.

2. You could withdraw or amend entitlement to the variable remuneration elements that should be taken into account when calculating holiday pay. However, note that in the majority of cases these are likely to be contractual and you will need agreement. There is also scope for the collective consultation obligations to be triggered if more than 20 dismissals arise in a 90 day period.

Will it not alert staff if I make a payment?
At this stage very few workers, Trade Unions, claimant lawyers and, most importantly, claims management companies are aware of the potential holiday pay miscalculation liability for employers.

However, once the Tribunal claims reach the appeal stage and the UK Government steps in to make a reference to the ECJ (which appears likely), the negotiating position of the workers will fundamentally change in their favour, and employers are likely to be faced with collective grievances and/or Tribunal claims.

How can Ward Hadaway help?
We have developed an audit product, to assist your business in determining their risk and potential financial exposure, and ensuring as far as possible that any findings attract legal advice privilege. The audit will involve the following:

1. A review of your current holiday pay calculations to determine which elements are legally compliant.

2. A review of the variable remuneration documentation.

3. A strategy to minimise your legal risk with the objective of avoiding historical holiday pay shortfall liability for previous years.

How can I find out more?
For a free initial consultation please do not hesitate to get in touch.