Holiday pay changes: Are your payroll, time and attendance systems up to date?

Payroll and HR departments should update holiday pay policies and time and attendance systems in light of UK Supreme Court rulings, advises Bob Hoskins, Director of Product – HR & WFM.

[UPDATED 11 MAY 2023]

The legal case of the Chief Constable of the Police Service of Northern Ireland (PSNI) v Agnew NICA 32 [The Court of Appeal in Northern Ireland], came before the UK Supreme Court in December 2022. The ruling is yet to be reached.

It centres on whether employees could bring historic holiday pay claims if there was a gap of three months or more between the periods in which an underpayment occurred. In England, Scotland, and Wales, employees must bring a claim within three months of such a deduction, or within three months of the last deduction should a series of underpayments have taken place. 

The case reached the Supreme Court after the PSNI lodged an appeal against an earlier NICA ruling. This indicated that the complainants in the case had not received the holiday pay due to them over the course of many years. As a result, if the Supreme Court rules against the PSNI, it could potentially owe them back pay of about £30 million.

The risk of rising claims and increased complexity

In broader terms, employers across the UK could also face similar claims, as the ruling will be binding across the entire country. Not only would it become easier for employees to lodge claims for historic underpayment of holiday pay, but it could also become more difficult for employers to work out holiday pay rates.  

This is because the Supreme Court will also establish whether any given day of holiday would come solely under the Working Time Directive (WTD), the Working Time Regulation (WTR), or a combination of all types of leave. If it decides to follow NICA’s reasoning that holiday days are a combination of all leave types, employers will have to make various complex calculations in order to get it right. 

For example, unlike WTR, pay for WTD days considers normal remuneration and so needs to take things like overtime and commission into consideration. Employers would need to work out what proportion of each approach applies to a given holiday day – although a simple alternative would be to just base all holiday pay on normal remuneration. 

No matter which way the Supreme Court’s ruling goes, it’s imperative that payroll and HR teams review their current and historic holiday pay policies. Check if any underpayments have occurred and whether pre-emptive action should be taken. Ensure that time and attendance systems are delivering what

What about holiday pay for part-year workers?

Another problematic legal case relating to holiday pay is that of the Harpur Trust v Brazel. A survey by HR consultancy WorkNest revealed a key concern. Some 88% of employers ‘don’t fully understand’ its implications or the impact it could have on their business. 

The ruling in July 2022 indicated that people on part-year contracts, such as term-time education workers, could be due more pay than previously thought. The court ruled that the traditional ‘percentage’ approach to calculating holiday pay was unlawful. That method pays workers the equivalent to 12.07% of the hours they worked over the course of a year,  

Instead, the Supreme Court pointed out that part-year workers on a continuing contract throughout the year should be the same as full-year workers in terms of holiday entitlement. This means part-year workers will be entitled to 5.6 weeks per year, the statutory minimum set out in the Working Time Regulations 1998, sections 13 and 13A.  This entitlement should NOT be pro-rated.

So, employers need to calculate the holiday pay of part-year workers on variable hours based on their average earnings over 52 weeks. Don’t include any whole week in which they received no pay.  

The UK government’s holiday entitlement calculator can be useful in helping to work it all out. 

Failure to get it right could amount to a breach of a worker’s employment contract. Again, this makes it imperative for employers to update their policies. Otherwise, they run the risk of costly, reputation-damaging employment tribunal claims.

The compliance benefits of advanced payroll, time and attendance systems

Luckily for Zellis customers, the average holiday pay (AHP) functionality (in ResourceLink’s Leave Management module) allows you to: 

• Generates weekly average holiday pay (AHP) based on the weekly tax calendar instead of the employee’s actual pay frequency 
• Calculates average weekly pay based on the last 52 paid weeks  
• Determines if the last 1.6 weeks of statutory paid entitlement is based on normal remuneration or a week’s pay  

• Excludes weeks where there is no pay  
• Prevents the calculation going back further than 104 weeks in order to find 52 paid weeks 
• Excludes a week if absence is present for a whole working week  
• Gives you the option to include temporary and/or fixed pay elements in the AHP calculation  
• Enables you to view a breakdown of all the weeks and payments included and excluded in an employee’s AHP calculation

Our advanced payroll systems help you stay compliant and successful. Learn more here.