If this is case, your business is very likely to be affected by this recent ruling regarding the calculation of holiday pay.
Employers in the education, healthcare, manufacturing, retail, hospitality and leisure sectors are likely to be impacted by this ruling.
This does not affect those engaged on a fixed salary.
Workers are entitled to 5.6 weeks statutory holiday entitlement, regardless of whether they work for the whole year or only part of it.
The calculation of their holiday entitlement / pay must be based upon the employee’s average pay over a 52 week reference period (ignoring weeks where there was no pay) x 5.6 weeks.
Before this ruling, it was widely accepted practice that employers could pay 12.07% of holiday pay per hour worked. This previous method was even the method recommended in the ACAS guidance at one point, and many employers adopted this approach. However, it is now clear that employers can no longer calculate holiday pay for workers with irregular working patterns using this 12.07% method.
Employees may seek to make a claim for underpayments of holiday pay via an unlawful deduction from wages claim. Although claims must be brought within three months of the last underpayment of holiday, the liability can go back two years from the date a claim is issued.
All employers should now review their holiday practices and contracts to determine whether they comply with the recent judgement. They should identify those who they engage on a permanent basis, but not on a fixed salary.
A calculation to quantify the difference between what has been paid as holiday pay, and what should have been paid following the ruling, will enable an employer to determine any underpayments and therefore calculate their potential exposure to date.
It is advisable for employers to undertake a review at the end of each holiday year or the end of each contract, to compare the holiday pay entitlement (using the average pay in the 52 week reference period x 5.6 weeks) against the amount paid to each employee.
Employers may consider notifying their insurance broker and providing them with details of the estimated underpayment / current liability.
Employers may also consider whether to offer payments to those employees affected, in an effort to reduce the possibility of them making any claim for historic holiday pay.
It may be helpful to move away from engaging workers on a permanent contract with zero or irregular hours. Consider engaging workers on a fixed term contract for a specific period of time.
Employers should also ensure that the employment status of all contractors has been reviewed to assess the risk of any individual being considered to be an employee.
Employers should seek guidance from their usual employment law contacts and be aware that there are likely to be further developments.
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