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Employee holidays

14 June 2005

Perhaps surprisingly, the legal right to paid holiday has only existed since 1998. The Working Time Regulations 1998 introduced a statutory right to four weeks' paid leave in each leave year. The principle is simple, but as usual putting it into practice is never quite as straightforward. What about those workers who start work part-way through a holiday year? What entitlement do part-timers have? Can employers recover holiday overpayments from a worker's final pay cheque?

What is a worker's basic right to holiday? By law, a worker is entitled to four weeks' paid annual leave (known as "statutory leave"). This is a minimum entitlement. A worker may have a greater entitlement under his contract of employment (known as "contractual leave"). One type of leave is set off against the other, so statutory leave is usually counted within any contractual leave entitlement.

Does statutory leave include public holidays? In England and Wales, there are usually eight bank or public holidays each year. Under the Regulations, the right to four weeks' leave is not additional to public holidays. Therefore, public holidays can be included as part of a worker's statutory annual leave entitlement. As part of its election campaign, Labour pledged to ensure that public holidays would be given in addition to the four weeks' statutory leave, if it secured a third term in government. No legislation has yet been proposed but employers should be aware that in future, public holidays may well be granted in addition to the four weeks' statutory leave.

Who is entitled to statutory holiday leave? The Regulations apply not just to "employees" but to a wider category of "workers". However, the genuinely self-employed are excluded. As a general rule, a person is a "worker" for the purposes of the Regulations, if he is someone who is paid a regular wage or salary and works for an organisation, business or individual. The employer normally provides the worker with work, controls when and how the work is done, supplies him with tools and other equipment, and pays tax and National Insurance contributions. However these are only general guidelines and each case must be looked at individually.

Does the law prescribe when a holiday leave year begins? A holiday leave year can start on any date in the year agreed between the worker and employer. It is usually specified in the contract of employment or employer's handbook. If there is no such agreement, the holiday year will begin on 1 October 1998 (and subsequent anniversaries) for those who started work on or before 1 October 1998. If the worker commenced employment after 1 October 1998, then the holiday leave year will start on the date the worker started work for the employer.

What about part-time workers? Part-time workers should have an appropriate pro-rata entitlement to holiday. For example, a person working three days a week would be entitled to 12 days' paid statutory annual leave. Equally, if a full-timer gets paid for bank holidays in addition to their statutory leave, then part-timers are entitled to a pro-rata entitlement.

What happens when a worker starts work part-way through a holiday leave year? Where a worker begins work after the start of the employer's holiday leave year, the worker's holiday entitlement will be proportionate to the amount of the leave year remaining (ie a pro-rata entitlement). For example, if the holiday year runs from January to December and a new employee starts on 1 August, his entitlement is 5/12ths of the leave year. Where such a leave period includes a proportion of a week, the proportion is to be determined in days and a fraction of a day will be rounded up to count as a whole day.

What if a worker leaves before the end of the leave year? Similarly their annual leave entitlement is pro-rated to the proportion of the leave year that they have worked.

Is there a period of eligibility before a worker is entitled to take leave? A worker's entitlement to paid statutory annual leave begins on the first day of employment. Only workers in their first year of employment are said to "accrue" their statutory holiday leave. All other workers, subject to giving appropriate notice, can take leave at any point in the holiday year without first having to "accrue" it. During the first year of employment, an employer can use an accrual system, whereby, the portion of the leave which may actually be taken (with the employer's agreement) builds up over the year. The amount of leave which may be taken accrues in advance at the rate of 1/12th each month. Where this calculation does not result in an exact number of days, the amount of leave which may be taken is rounded up to the next half day. Any rounded up element is deducted from the leave remaining.

What is a week's leave? A week's leave should allow the worker to be away from work for a week. So it is the same length of time as they work in a normal week.

When can leave be taken? The Regulations allow employers and workers to agree their own arrangements for taking leave. There are usually provided for in the contract or other company documentation. In the absence of any agreed procedure, the Regulations provide that a worker may be required to take all or any of their leave under the Regulations at specified times provided that prior notice is given by the employer. The notice from the employer should be at least twice as many days as the number of days' leave to be taken.

Under the Regulations, a worker can also give notice of when they wish to take leave. Again, the notice period should be at least twice the period of the leave to be taken. The employer may refuse the worker permission to take such leave. To do so, the employer must give notice equal to the number of days' leave requested. In practice it seems preferable to agree longer and more workable arrangements.

Can leave be carried over to the next holiday leave year? Statutory leave cannot be carried over to the next leave year. It must be taken in the current leave year. So for example, leave for a holiday year commencing 1 January 2005 must be taken before 31 December 2005. Employers can make separate arrangements to carry over contractual leave in excess of the statutory minimum, if they wish to do so. Where carry over of contractual holiday entitlement is allowed, employers will generally impose a time limit on when the carried over leave should be taken, for example, within three months of the end of the holiday year.

What about those on long-term sick leave? Previously, case law interpreted the Regulations as not imposing any obligation on a worker actually to perform work or be present at work in order to be eligible to receive paid annual leave. Therefore, workers on long-term sick leave were entitled to take four weeks' statutory holiday pay, where they had given appropriate notice to their employer. However, this approach was recently overruled by the Court of Appeal. Now, if a worker has not attended work throughout the holiday year because of long-term ill-health and has exhausted their entitlement to sick pay, then they have no entitlement to claim holiday pay under the Regulations. This clearly leaves some uncertainty as to what is the position with regard to those who are absent for a proportion, but not the whole of the holiday year. A logical solution may be to take into account the amount of time worked during the holiday year and to pro-rata the holiday entitlement accordingly. The current law however leaves it open to a worker to argue that attending work at some point during the holiday year means they continue to accrue their full entitlement to statutory holiday. The issue is likely to be appealed and until it is, there is no clear guidance.

How do you calculate a week's pay? Workers are entitled to receive a week's pay for each week's leave. For those with normal working hours (ie the number of hours fixed by their contract), a week's pay is the amount that they would earn for a normal working week. Overtime, unless it is contractually guaranteed, overtime is not included. Commission payments may also be excluded from holiday pay calculations, depending upon how the employee's remuneration is structured.

If a worker does not have normal working hours, a week's pay is calculated by reference to his average pay over a 12 week period. A worker's contract may allow for more generous holiday payments.

What about rolling up holiday pay into basic salary? There has been much debate in the courts about whether the practice used by some employers of rolling up holiday pay into workers' hourly or weekly rates of pay is lawful. Such "rolled up" arrangements are commonly used for administrative convenience in particular industry sectors where the workforce may be transient or operates on a shift system. The matter has been referred to the European Court of Justice for definitive guidance although a decision is not expected until late 2005/early 2006. In the meantime, if employers wish to use this kind of arrangement, they should ensure that it complies with recent court guidance on rolled up holiday pay. In essence, any rolled up holiday pay arrangement must ensure that there is mutual agreement between the worker and employer for genuine payment for holidays, which represents a true addition to the contractual rate of pay for the time worked.

Can employers make payments in lieu of untaken holiday? An employer cannot pay a worker in lieu of holiday entitlement under the Regulations unless the worker's employment is terminated. This does not however prevent employers and workers from agreeing to a payment in lieu for untaken contractual holiday entitlement over and above the four week entitlement provided for in the Regulations.

How do you calculate holiday pay on termination of employment? The Regulations set out how to calculate a payment in lieu of accrued but untaken statutory holiday, when the worker's employment ends. This formula will apply if there is no other agreement between the worker and employer on how such a payment should be calculated. The statutory formula basically deducts the worker's entitlement from the amount of leave he has already taken. For example, if a worker works five days per week and terminates their employment six months into the leave year having taken six days leave, the entitlement would be to a sum equivalent to: (20 days x 0.5) - 6 = 4 days leave. The worker would therefore be entitled to four days' payment in lieu. An employer cannot provide in the contract that no payment in lieu of accrued statutory holiday will be made. However, in certain circumstances (eg dismissal for gross misconduct) it may be acceptable to allow for token payment. The amount of holiday a worker has accrued should be calculated on the basis of the number of working days and not calendar days in the year.

Can an employer recover holiday overpayments? If a worker has taken more holiday during the leave year than he has accrued up to his termination date, then employers often deduct such payments from the final pay cheque. An employer will only be able to do this where there is an agreement between the worker and employer to do so. Such a provision is often included in the contract of employment. Employers should take note that in the absence of such an agreement, no deduction can be made.

How can workers ensure Regulations are upheld? Under the Regulations, the right to paid holiday is enforced through the employment tribunals. Usually, complaints must be presented within three months of the date on which it is alleged that the leave should have been begun. Where a complaint is upheld, the tribunal will make a declaration to that effect and may award compensation to the worker.

Gareth Edwards is an associate solicitor and Michelle Chamberlain is a practice support lawyer in the Eversheds Human Resources Group.

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