COMPLIANCE
Table to show how proposed changes will impact holiday pay and entitlement
must calculate an average week’s pay. However the calculation is slightly different for each category: l workers with variable pay and fixed hours – calculate an average hour’s pay, then multiply this by the fixed weekly hours l workers with variable pay and variable hours – calculate an average hour’s pay, but also calculate an average number of hours per week, then multiple the average hourly pay by the average weekly hours l workers with no normal hours – calculate an average week’s pay. The resulting average week’s pay can be further divided into days or hours of entitlement if necessary for a pay rate, using the worker’s fixed or average working time per week. An example: An employee contracted to work 37 hours per week with regular commission payments is classified as a ‘variable pay, fixed hours’ worker. Reviewing the payroll records, we establish that over the last 52 weeks, the employee had two weeks in which they didn’t work, and so the reference period is extended to 54 weeks. Within this period, the employee received £25,974 of relevant earnings for 1,924 hours’ work. The holiday pay calculation would be £25,974 / 1,924 = £13.50 average
leave and only leave entitlement must be monitored, with no adjustment to pay required. For the three other groups of workers, our next step is to calculate an average week's pay and ensure this pay rate is paid when they take a holiday. Which types of pay are included in the calculation? Holiday has, so far, been subject to many different pieces of case law changing the definition of what should be included in the definition of ‘normal remuneration’. The new regulations provide firm definitions of what should be included, but for now, the current stance is that the following should all be included in holiday pay calculations: l wages, salary, base pay l ‘intrinsically linked’ pay (for example, shift allowances or work-related bonuses) l commission l overtime (guaranteed, non-guaranteed and voluntary). The 2017 decision in Willets and others v Dudley MBC also includes all payments made ‘over a sufficient period of time and on a regular basis’, meaning that organisations should review pay elements carefully and only exclude truly ad hoc payments from consideration. It’s worth noting that, if passed in their current format, the new regulations would provide firm definitions of pay to be included (intrinsically linked payments, payments for professional or personal service and other
payments made regularly in the preceding 52 weeks). Once we have reviewed the payments to be included, we can identify workers who fall into the variable pay groups and next, we can look at the average pay calculation. What’s the reference period for holiday pay calculations? Since April 2020, the law asks for holiday pay calculations to consider 52 weeks’ pay. This may seem straightforward on the surface, but in practice can become complicated as we must exclude any week without relevant pay in it, and instead extend the reference period back another week. This means that: l each employee may have a different reference period, considering periods without work l pay must be allocated in weeks even if the worker is paid in months. For workers with normal working hours (even if the pattern is longer than a week), working time is the only factor considered in the calculation. We should exclude absence pay and discount any week in which the worker was entirely absent. For workers with no normal working hours, we should include any week in which the worker received remuneration in our calculation including weeks with payments for absences. How do we calculate a rate of pay for holiday absences? For all three groups with variable pay, we
hourly rate x 37 hours = £499.50 per week (£99.90 as a day rate if administered this way).
Currently, the calculation must include all variable rates of pay as identified above. However, the new regulations would separate the ‘additional pay’ above basic pay into a separate calculation and pay this as a ‘top-up’ calculated as a week’s average of these payments over the previous 52 weeks. For now, though, employers must aim for compliance with the current rules for any leave years beginning before the regulations come into effect. Help is available Holiday pay may still be a prickly issue, but there are a variety of resources available to help, from GOV.UK's web-based guidance, to the CIPP's Advisory Service and our holiday leave and pay course. Overall, with the right knowledge and support, employers can ensure holiday entitlement and pay are managed effectively as it stands now and when the new changes are implemented. https://ow.ly/5XG550Q7Pyf. n
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| Professional in Payroll, Pensions and Reward |
Issue 96 | December 2023 - January 2024
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