Businesses must avoid holiday pay pain

Businesses with employees who work shifts, receive allowances or earn commission could be facing up to a costly holiday pay bill this summer as recent European case law on the calculation of holiday pay kicks in.

Employment law experts from LAW at Work (LAW) are warning that some sectors are more likely to be affected than others, but that every employer could face a hefty pay out should they not address this issue.

Previously most employees, no matter what type of work they were undertaking, would only be entitled to their basic salary when taking their annual leave entitlement. Last year, the European Courts found that this was unlawful as it discouraged those who earned the majority of their income from overtime, allowances and commission, to take time off.

Now, employers must pay the equivalent to what an employee would normally earn, should they have been at work during that holiday period or face the courts awarding the underpaid money.

As this is the first summer holiday season where the new ruling will come into play, organisations are being urged to consider now how they will manage this significant change, or potentially they will leave themselves open for court action against underpayment when the employee sues them.

This change in pay structure is likely to affect all types of workers who receive regular bonuses, allowances or commission payments. Care home workers, even some nurses, who might traditionally receive a night-shift allowance payments, will now be able be eligible for imbursement of this when off work for holidays.

Those who work in sales, or recruitment, who would normally earn commission whilst at work, can now claim for any lost money they would have potentially garnered whilst away on annual leave.

Others, such as those on zero hours or low core hours contracts will also be able to claim for what they might have earned should they normally have worked additional hours above their basic contract through overtime.

Employers are likely to face headaches when attempting to calculate what each employee could rightly claim as a typical day with the various allowances, commissions, over-time etc. There is yet to be a firmly established method to calculating this, but Donald MacKinnon, director of legal services suggests that employers review the average pay over the past twelve weeks to give them a guide. He said:

“Employers now have to give consideration to what the employee would likely have earned when they are on annual leave; calculating what they would have earned if that same employee was doing the same job in that time period. This means, that each employee’s pay record should be reviewed for at least the twelve weeks before the annual leave period to calculate what the average pay was for a week. This will then help calculate what the new holiday pay per day would be for that individual employee. This new rate will apply for the first 20 days of an employer’s holiday period.

“In the meantime, this will be the first big holiday pay season where the new rules are something that businesses should be paying attention to if they want to avoid being taken to court or have additional years added to the potential back payment to all past employees.”