Contracts and holiday pay calculations

Mathew Akrigg , Policy and Research Officer

Mathew Akrigg is the Policy and Research Officer at the Chartered Institute of Payroll Professionals (CIPP). Mat publishes payroll news, produces technical articles and presents on events. He is committed to educating the payroll profession to ensure compliance and understanding.

As the tax system gets more complex and case law increasingly impacts payroll, contracts become ever more important. Gone are the days where payroll professionals could ignore contracts and leave them with human resource (HR) departments to deal with (unless you’re both HR and payroll rolled into one).

Contracts and holidays

Over the past year or so, the main culprit which comes to mind is holiday pay. Now, if you’re as ingrained in the payroll world as I am, you’ll probably be sick to death of hearing about changes to holiday pay. It seems 'Brazel' may conjure similar connotations for holiday calculations as 'Alabaster' does for maternity pay in payroll spheres.

The case of Harpur Trust v Brazel brought us the term 'part-year work'. This is very different to 'part-time work', instead describing "workers who work for varying hours during only certain weeks of the year but have a continuing contract". One such example would be what has historically been referred to as a 'term-time worker', although they can take other forms.

Calculating holiday pay

Following that judgement, whether someone is employed on a part-year contract or not, becomes crucial in the correct calculation of holiday entitlement. For example, a part-year worker with an overarching contract only requiring them to work every other week would still receive the full 5.6 weeks of entitlement each year.  The Supreme Court verdict openly acknowledged this would be preferential when compared with counterparts working every week.

Part-year workers who either join or exit part way through the leave year would have their holiday entitlement pro-rated accordingly, but that entitlement would also have to be calculated at this preferential rate.

To many this outcome came as a surprise and the government has since consulted on the potential implications and proposed changes. But, as we should all know, Supreme Court verdicts are clarifications of the law, not changes, so we must ensure we’re compliant with those clarifications.

Workers on part-year contracts should therefore receive the full allocation of 5.6 weeks. This has caused some employers to question whether their part-year workers should be on permanent contracts or if they should instead be on fixed-term ones. There remain questions over whether this is the correct course of action or if it will have other unintended consequences.

What to include in holiday pay

Another factor we must consider from a contract perspective (or relevant agreement) which could impact employees is what pay components are included in holiday pay. There are several pieces of case law which affect the first 4 weeks of leave, but beyond that, the law loosens off with a lower floor for what must be included.

So, if you want to include bonus pay, overtime or other intrinsically linked payments, it's best to make these things clear within contracts. Even more so for any contractual leave beyond the 5.6 weeks, as what's paid is totally at an employer's discretion. Loose wording can lead to disputes and disputes can lead to tribunals, which could cost an employer more in the long run.

Considering additional holidays

Finally, until the last couple of years this hasn’t really been an issue, but what does your contract say about bank holidays? We usually have eight bank holidays in England and Wales, which align with (but don't have to be used for) the 1.6 weeks of additional annual leave in UK law. However, bear in mind that in recent years, we've seen extra bank holidays to mark momentous occasions.

Here are 3 examples of contract wording regarding bank holidays which have different outcomes when considering a year with additional bank holidays:

  • 20 days plus bank holidays
  • 20 days plus 8 bank holidays
  • 28 days including bank holidays  

The first would provide the minimum of 4 weeks and any number of bank holidays, be that the usual 8, or 10 as it was last year.

The second would provide for 8 bank holidays, but what about the extras? Remember, you can go above and beyond this, but if you were sticking to the contract wording, you’d be expecting any extra bank holidays to either be worked, be paid leave subject to availability or taken as unpaid leave.

The last option could include all extra bank holidays, but then are you not providing the statutory 4 weeks of standard annual leave in law? You need to ensure that you are paying 4 weeks at 'normal pay' rate, even if some are used to cover additional bank holidays. Consideration should also be made for those who calculate their holidays in hours instead of days.

Be clear with your contract wording, and ensure you consider edge cases and how they would be accommodated. Many times the answer will be to go above and beyond your legal duty, but this usually comes with costs. As long as you're aware of that, you can plan effectively when it comes to contracts.

Breaking news: Supreme Court verdict of backdating claims

As if we had not already endured a challenging year of holiday pay talks and speculations, the Supreme Court decision, in relation to Chief Constable of the Police Service of Northern Ireland v Agnew, brings a new development.

The court judgement asserts that where the underlying basis for a series of unlawful deductions is a factual one, the deductions can be linked, even if more than 3 months has passed between unlawful payments. Whether there is such a link will be specific to each scenario, but in this case the link was the employer knowingly paying only basic pay for all annual leave.

In Northern Ireland, this means that backdating claims could go back to the start of the employment. In the rest of the UK, there is still the two-year backstop for claims, but this could still represent significant claims for employers to handle.

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