Holiday Pay, Rolled Up Holiday Pay, overtime etc

DMS · PayPerShop Newbie Joined: 27 May 2004 Posts: 5

Following the ECJ ruling that makes Rolled Up Holiday Pay unlawful, I wonder what other people will do to meet their legal obligations - I'm struggling.

I run a service which advises disabled people who employ their own personal assistants. Many of them use bank workers who just work here and there and we've used Rolled Up Holiday pay (in a very transparent way) to give workers their entitlement - and never had any problems. However, now I'm trying to find the most simple way to arrange things. I know that the Working Time Regs explain how to work out holiday pay for people with no set hours but I can't get my head round it because it says you should look back and work out the average pay over the past 12 weeks to work out what someone should be paid during their week off (assuming of course that people take a full week - it doesn't mention anything if they want to take a couple of days!!). But then it says that if someone didn't earn during one week, add in the pay from from the week before the 12th week. Why? What if someone didn't work for five of the 12 weeks? Do I go back and find the next five weeks when they did earn something and how can that be fair?

One thought I did have was to sort of work an "accrual" system. This I guess would be similar to rolling up the holiday pay, but not giving it to the worker until they take leave. Presumably this would work provided that the worker was clearly able to take four weeks off work during the year. There may be an issue about how much to actually give them when they take a week off - which links to the paragraph above.

We also have this daft situation where we may have a worker who just works during 8 weeks in a whole year. Do we really have to wait for them to phone up their employer to say, "I know I'm not working for you for the next five weeks but I'd like to take some paid leave the week after next".

Another related issue. The WTR clearly state that voluntary overtime does NOT accrue paid leave. Does this mean you could put bank workers on a nil hours contract and deem everything they work as overtime? Surely it couldn't be that simple! But it seems unfair that someone working a certain number of contracted hours gets paid leave for those contracted hours but not paid leave for the overtime they work, but someone who has no contracted hours but just works hours which they agree to, gets holiday pay for those "overtime" hours?

Any comments, help, advice etc would be welcome.

Hugo Fair · PayPerShop Regular Joined: 22 Jul 2004 Posts: 73

To take your points/questions in reverse order.

"Overtime" hours:
The potential loop-hole that you mention doesn't exist simply because a person with zero contracted hours cannot have any 'overtime' hours. The whole point of this term in the WTR is to determine the 'average pay' to be used when calculating a day's (or hour's) holiday pay. Overtime cannot be guaranteed if it is 'voluntary', whereas overtime that is part of the contract is by definition guaranteed and so can be counted when calculating the average pay-rate.

Number of weeks/days:
There is no statutory requirement for an individual to actually receive '4 weeks/p.a.' of paid holiday. This figure is the equivalent for an individual who works full-time for the whole year - and should be pro-rated for an individual who works part-time (e.g. Mondays only). Such a person would only be entitled to 4 days of paid holiday/p.a. - which means you need to be able to calculate their rate of pay for a holiday DAY (not WEEK).
If your workers are only working occasional hours, you should probably calculate their rate of pay for a holiday HOUR!

Calculating holiday 'pay-rate':
WTR rules are indeed complex, but there isn't any obvious way round this. On the other hand, if you used to have a separate rate (when you were paying 'rolled-up holiday pay'), then I can't see why you can't continue to use this rate.

When to pay 'holiday pay':
Like you, I await with interest an agreed set of practical rules to resolve this. On the surface, an "accrual" system would appear to be the only answer - i.e. not paying it to the worker until they take leave - but this would appear to make you responsible for a) logging when the worker actually takes paid holiday and b) ensuring that they take enough of it each year. This is probably in line with the intentions of the EC but seems (to me) to be neither practical nor reasonable.

Any other advice/comments would be welcome!

Ian Congreave

Thank you Hugo for contributing your experience and time to this very difficult employment area.

I have already responded to a related question on the Forum and I am using the basis of that answer to comment on this question too.

I am going to tackle the subject in terms of principles, because I think that is what the Working Time Regulations (WTR) is all about. I don't think that the legislation itself is complex - it is defined in a relatively few paragraphs in the regulations. The complexity arises because employment arrangements differ so widely - the complexity is in the application of the regulations to each employment arrangement - and yours are as complex and variedas they come.

Therefore, the principles are important - what are the Regulations - and the original European Directive - trying to achieve? That was the basis on which the recent decision on rolled-up holiday pay was decided. I don't think the courts had a problem with the concept of rolled-up holiday pay - the problem was that it did not achieve the objective of the Directive, i.e. to give people their holiday pay when they actually go on holiday.

The WTR treats holidays as two components - time and money. Although they have to come together when the holiday is taken, they are determined separately.

First, time. The entitlement is to four weeks - the actual time depends of course on each worker's hours or days of work. Employers may choose how to calculate entitlement - an accrual system can be used for example - but the result must not be less than the statutory minimum. The WTR simply requires the period of leave to be proportionate to the length of service in the employee's holiday year to date. ("holiday year" is another subject - but not for discussion now)

The issue for your workers is to determine, at any point in the holiday year, their length of service. This brings the "continuity" rules into the picture, which, unlike the relatively straightforward WTR rules, are complex and frequently subject to court cases. However, the law says that a person's continuity of employment is presumed to be continuous unless it can be shown to the contrary and, as I presume that the casual workers you describe have an on-going relationship with their employers, even though they may not work every week, there is a presumption that the contracts are continuous.

Therefore, I would presume, unless there are other factors at play, that these workers are entitled to the full four weeks' holiday each year. As Hugo has explained, what "four weeks" means depends on each worker's days or hours of work in the holiday year to date. If a worker works, on average, 5 hours a week, then four weeks is four weeks of five hours.

When should they take the four weeks? This is for the parties to agree. The WTR says that contractual rules apply if they exist but, in their absence, the worker or the employer can give notice as to when the holiday will be taken. There is nothing to stop the employer making that decision and designating a particular week, by giving appropriate notice, as the week in which a week's holiday will be taken and payment for that holiday made. (WTR Regulation 15)

The second issue is pay. For each week of holiday you have to pay a "week's pay". I have suggested that the WTR in itself is not complex - in contrast, the "week's pay" rules, which incidentally are to be found in the Employment Rights Act - not the WTR, are highly complex and, in many working arrangements, virtually impossible to apply. Again, the principle behind the rules is important. The rules are intended to ensure that, when workers are absent for a week, the amount paid is the equivalent (on average, if necessary) of what they would have received if they had been working (other than overtime).

I need to clarify some issues here with regard to the application of the "week's pay" rules. They cover 5 specific situations, namely

1. where an employee�s pay does not vary during normal working hours
2. where pay varies for work done during normal working hours because it includes commission or other variable payments
3. where pay varies for work done during normal working hours because those hours qualify for different rates according to when they are worked
4. where there are no normal working hours
5. where an employee has less than twelve weeks� service.

Your question makes reference to the 12-week average calculation. The complex versions of this calculation only apply in situations 3 and 4 - i.e. where a worker's pay varies due to commission and other payments, or due to different premiums being paid for shift working. In those cases, earnings in earlier weeks have to be considered if there are missing weeks during the first 12.

However, that complexity does not arise in your situation, where there are no normal working hours. There are only "normal working hours" where the contract defines a fixed number of hours work each week, after which overtime is paid. So, your workers do not have normal working hours.

So because there are no normal working hours, the first point is that there cannot, by definition, be any overtime to take into consideration. Overtime does not exist so it does not enter into the calculation. The second point is that, in this situation, only the pay in the 12-week period is used, even if there are gaps in the 12 weeks. A week's pay is the average weekly pay over the 12 weeks prior to the start of the holiday.

Using an accrual system to determine rolling entitlement to holiday leave and pay is fine, many employers do it. The only point to bear in mind is that the WTR method is not accrual, it simply says that you should work out the entitlement in proportion to the period of time passed so far in the holiday year, reduced by any holiday already taken in the holiday year. Any accrual method should not give less than the "proportion" method (as many monthly accrual systems do in some situations, incidentally).

I have one further suggestion, that was made by the Advocate General in the early rolled-up holiday decision, and that is the use of a holiday credit scheme as is used in the construction industry and in some manufacturing industries. The employer pays the holiday money each week, i.e. the money that you would have been paying to the worker as rolled-up holiday pay, to an third party, who saves the money and, when the worker wants to take the holiday, claims the money from the third party. If this were done using the construction industry system, there are potential NICs savings as well (page 28 or HMRC's CWG2 booklet). But, if you could find some acceptable way of a third party saving the money, under an arrangement that enables workers to get the money when they take the holiday, I think that would be an ideal solution to the problem of holiday pay for casual workers.

I hope that has helped but, if you still have questions, please do not hesitate to post again.
_________________
Ian Congreave, PayPerShop owner

PayPerShop provides a free weekly UK payroll news service - http://www.paypershop.com/latestnews.html

DMS · PayPerShop Newbie Joined: 27 May 2004 Posts: 5

Thanks to Ian and Hugo - I'm always impressed by the length and detail of the replies.

I grasp the "overtime" issue in that if you are on a nil hours contract you can't have overtime. Thanks.

On Hugo's point on "No of Weeks/days" I know what you are saying but I disagree with your statement "There is no statutory requirement for an individual to actually receive '4 weeks/p.a.' of paid holiday. ". Everyone is entitled to 4 weeks paid holiday based on their normal hours of work. If they only work 1 hour a week they still get four weeks paid holiday (4 hours). If they only work 2 hours every four weeks, they still get four weeks paid holiday (2 hours) etc. As it happens we always work out holiday in hours.

I don't think the idea of paying the holiday to a third party will work - it will just complicate things - but thanks for the suggestion.

I guess we'll work on the basis of an accrual system. The notion of someone requesting holiday when they wouldn't be working anyway is a little "daft" and takes a little explaining to people - I'm working with people who have no or very little experience of employment issues etc.

Thanks again for your help.

KClaydon · Posted: Wed May 10, 2006 11:56 am Post subject:

Rolled up holiday pay:

As we knew this was coming for some time (and not usually in the Recruitment Companies favour) we have always paid holiday pay separately. To help calculate the 12 weeks average pay we have asked the payroll bureau we use to run a report that adds the previous 12 weeks paid together and divide by 12. This then gives us a report with a daily working average pay rate.

I then hold separately a spreadsheet that calculates from someone's start date on our payroll up to date how many days holiday they have accumulated. When the candidate then requests holiday pay I can check they have accumulated it and then pay them their working daily average pay rate.

The one thing we have learnt is to P45 someone as soon as they stop working for you so are not liable for any further holiday than necessary.

This all takes time but we feel we this is the best way we can accommodate these regulations. If anyone knows a better way then I would love to hear from you.