The rules surrounding holiday pay for staff

Last year saw a number of legal rulings that affected staff entitlements to holiday pay. There was much publicity about the decisions confirming that average commission payments should be taken into account when calculating holiday pay. There is a final appeal outstanding but I would be surprised if the decision is overturned. However, there were other equally important decisions made about overtime and holiday pay.

If it states in your employees’ contracts that they have to work overtime, which might include part-timers having to work additional hours, it is now clear that these hours should be reflected in their holiday pay. In short, when staff take holidays they should receive their normal pay, and of course their normal pay includes overtime. There were several different employment tribunal decisions in 2015 confirming the principle that when employees regularly work additional hours, and are required to do so, then their holiday pay should reflect this. Why is this such an issue in the beauty industry?

There are salons in which around 40% of a therapist’s earnings are commission based but historically when these staff took holiday they only received the minimum wage. The decision as to whether voluntary overtime should be included in holiday pay is still outstanding but where overtime is a regular feature of the job it seems clear that it should. As a salon owner you may take the view that you won’t incur the additional expense until you have to and await the definitive test case, but you might then receive a hefty claim for payment in arrears from staff when it is decided.

Change in hours
But what happens when an employee increases their hours part way through the year? In most cases you would simply make a recalculation. So if the holiday year runs from January to December and a therapist moves from three days a week (17 days’ holiday) to five days a week (28 holiday days) on July 1, then its fairly easy to give her 50% of the additional 11 days - 5.5 days extra holiday – that year.

Sadly the change usually doesn’t happen in such a straightforward way. A recent court case reached a helpful conclusion for salon owners. The worker involved changed their hours from one day a week to six. While working one day a week, the employee took seven days of paid holiday, which equated to seven weeks off and was, therefore, their entire year’s holiday entitlement. The employee argued that in reality they later had several months where they worked full time so several weeks of their holiday should now be paid at six days a week rather than one day a week. The case went as far as the European Court of Justice where the employee lost.

The court concluded that annual leave must be calculated in accordance with a worker’s contractual working pattern but that the taking of leave accumulated in one period has no connection to the working hours in the later period. In short, the employee had taken seven weeks’ paid holiday in the holiday year and therefore the employer had satisfied the minimum holiday entitlement payment. It was just unfortunate that when they took their holiday they were only working one day a week. Of course the same principle would apply if an employee took all their leave in the first half of the year as a full-timer then dropped to one day a week.

Long-term sickness
An employment appeal tribunal recently clarified two long-standing issues surrounding holiday and sickness. The first is that a worker on sick leave can carry forward untaken leave into a new holiday year under the Working Time Regulations. Secondly, the tribunal concluded that untaken leave cannot be carried forward indefinitely. Consequently, a worker can take annual leave within 18 months of the end of the leave year in which it is accrued where the worker was unable to take their leave because of sickness. Holiday pay is a complicated subject so it’s a good idea to spell out your holiday rules in a staff handbook or at a meeting.

David Wright is a consultant in all aspects of employment practice and law. He is the main employment law consultant for Habia and provides a personalised support service for UK salons.