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Staff holiday payments just got more expensive

Melanie Stancliffe

The way in which holiday pay is calculated has been challenged, meaning that many construction companies may be doing it wrong.

How much should your construction workers be paid when they take a holiday?

You might think this should be straightforward, but it has been one of the biggest and most costly employment issues of the last few years.

A number of cases have challenged the way in which holiday pay has traditionally been calculated for ‘normal hours’ workers who have received overtime payments and other allowances. Many construction workers are engaged on these types of contracts under which they are required to work a certain number of hours per week, perhaps on different shifts or pay rates, as set out in their contracts of employment.

The situation

Traditionally, construction businesses (and many other employers outside this sector) have only paid their staff basic pay when they go on holiday and have excluded most overtime payments and allowances from this calculation. In many instances this has resulted in workers receiving holiday pay at a lower rate than their normal rate of pay. 

This practice has been challenged in the courts and is now unlawful. All overtime (even if it is voluntary) and allowances that are regularly received and have, in effect, become part of the worker’s normal pay must now be included in holiday pay.

“All overtime (even if it is voluntary) and allowances that are regularly received and have, in effect, become part of the worker’s normal pay must now be included in holiday pay”

Unfortunately, there is no definitive guidance on what ‘regular’ means in this context. It is, however, likely to be interpreted widely and will include overtime that is worked at certain times of the year, or frequently over a short or longer period.

This principle also applies to allowances. So, any shift allowances, call-out allowances, travel or radius allowances (such as payments for travel to or between sites) that are regularly paid should be included, but reimbursement for ‘expenses’ should not.

An example

This can be illustrated in the following example: Geoff is a bricklayer working on a new development of houses. His contract requires him to work 35 hours per week. He receives paid overtime for working in excess of this and shift allowances. He is paid monthly.

Geoff works as follows:

  • January: no overtime worked, shift allowance paid
  • February: 15 hours overtime worked, shift allowance paid
  • March: 20 hours overtime worked, shift allowance paid
  • April: 3 hours overtime worked
  • May: no overtime worked, shift allowance paid
  • June: no overtime worked
  • July: 2 hours overtime worked
  • August: 3 hours of overtime worked, shift allowance paid
  • September: 25 hours overtime worked, shift allowance paid

This pattern (although somewhat random in terms of the amount of overtime worked and shift allowance paid) is likely to be considered ‘regular’.

Geoff will be entitled to have his holiday pay calculated by averaging his pay over a 12-week period before the first date of his holiday. Therefore, if Geoff takes a holiday in April, his pay will be higher than if he takes it in August (in the above example).

It may be possible for businesses to adjust the 12-week average period and select a more representative one.

For example, if overtime fluctuates widely over the year, or reflects spikes in demand, you may prefer to calculate holiday pay over a longer and more representative period, such as six or possibly 12 months. However, if you make any changes to the reference period, you will need to notify your staff.

Do we have to include overtime payments and allowances for all holiday taken?

No. All full-time workers are entitled to receive a minimum of 28 days paid holiday each year and you are only required to include regular overtime and allowances in calculating the first 20 days of holiday taken each year, and can go back to paying basic pay for the remaining holidays in each holiday year.

This may be administratively complex, particularly as your payroll team may have to adjust holiday pay rates during the same period of holiday depending on when and the amount of holiday taken.

Do we have to make changes immediately?

Not necessarily. If your holiday year is from January to December, you could amend your holiday pay calculations from the start of your new holiday year in 2018 because most of your staff will already have taken at least 20 days holiday this year.

If, however, your holiday year started at a later point in the year, you may need to make changes more quickly to avoid potential claims.

Melanie Stancliffe is a partner at Irwin Mitchell

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