Employment Law Q & A - Annual Leave

With the summer holidays upon us, this month’s Employment Law Q & A focuses on some of the legal issues surrounding annual leave.

Q  What are an employer’s basic legal obligations in terms of paid annual leave?
A  An employer’s legal obligations towards its employees are governed by the Working Time Regulations 1998 (as amended) (“WTR”).

A summary of the basic legal obligations relating to annual leave under the WTR are as follows:

• All workers are entitled to a minimum of 5.6 weeks’ paid leave in each leave year, capped at 28 days for an employee working 5 days a week or more (pro-rata for part-time employees). Bank and public holidays can count towards this entitlement. 
• The employer can determine the date that its holiday year commences provided that this is set out in writing (usually in the contract of employment). 
• Save in certain circumstances, the statutory minimum paid leave cannot be carried forward to a following holiday year, and it cannot be substituted by a payment in lieu except upon the termination of employment. 
• There is no minimum period of continuous service required to qualify for statutory annual leave. 
• A worker whose employment begins part way through a holiday year is entitled to paid annual leave for that year, pro-rated according to the portion of the holiday year worked. 
• Both the amount of paid holiday and the way in which it accrues can be changed by the employer, provided that its terms are more generous than the statutory minimum position required by the WTR. 
• In terms of taking leave, the WTR sets out minimum periods of notice that the employee must give to the employer when requesting leave, and that the employer must give to the employee if the dates requested are declined. 
• An employer can also give notice requiring the worker to take statutory holiday on certain specified dates.
• The notice requirements in relation to the taking of leave may be varied by way of certain forms of written agreement with the worker (including the provisions set out in the contract of employment).

Q Is it lawful to ‘roll-up’ holiday pay with the basic rate of pay for casual workers and/or those working irregular hours?
A Employers sometimes specify that part of the hourly or daily rate of pay given to casual workers or those working irregular hours constitutes holiday pay. This practice became known as ‘rolling-up’ holiday pay into the rate of basic pay. It was (and sometimes still is) used to overcome the difficulty and administrative burden of having to calculate the amount of holiday due when it is not known in advance how many hours will be worked, and therefore how much holiday will accrue.

The European Court of Justice has made it clear that rolled-up holiday is unlawful, but also said that any such payments that had been made by employers could be set-off against any claims against them for unpaid holiday pay, provided that certain conditions were met relating to the transparency of the holiday pay element. This has led to confusion as to whether although technically unlawful, employers could, in practice, continue to get away with carrying on rolling-up holiday pay with the basic rate of pay on the basis that it would be set off against any claims against them.

The WTR does not specifically deal with the issue. However, the current guidance on the DirectGov website states that holiday pay should be paid at the time that holiday is actually taken and that an employer cannot include an amount of holiday pay in a worker’s hourly rate (i.e. rolled-up holiday pay is not permitted).

As the risk in the event of a claim against an employer for unpaid holiday pay is that it might find itself liable for this on top of the rolled-up holiday pay it has already paid, any ongoing practices of paying rolled-up holiday pay should cease.

Q How should an employer deal with holiday entitlement for casual workers and/or those who work irregular hours?
A The solution to avoid the risks of rolled-up holiday pay (see above) is to calculate a worker’s accrual of holiday entitlement as the hours are worked. Employers who give their employees the statutory minimum entitlement to paid leave can do this by multiplying the hours worked by 12.07%. This is because 5.6 weeks leave is equivalent to 12.07% of hours worked.

For example: If an employee had to date worked a total of 60 hours, their current paid holiday entitlement would be 12.07% x 60 = 7.24 hours.

The practical difficulties in calculating the holiday entitlement and pay of such workers can be overcome by having a software package within the payroll system which easily calculates these amounts at any given time.

Q In relation to bank holidays, (1) what are the rights of part-time workers; and (2) are workers automatically entitled to an additional paid day’s leave for extra bank holidays (such as the Royal Wedding this year and the Queen’s Diamond Jubilee next year)?
A The first thing to make clear is that there is no statutory right for any worker to take time off on a bank holiday. The ability to take bank holidays off work, whether as paid or unpaid leave, will depend upon the provisions of the contract of employment (whether set out expressly in writing, agreed verbally, or implied by custom and practice). However, where bank holidays are given as paid time off, these can count towards discharging the statutory minimum entitlement to paid leave.

1. The entitlement of part-time workers’ to bank holidays has always been problematic, particularly where employers provide that workers are entitled to a specified number of days’ holiday in addition to bank holidays that fall on their normal working days. This often results in unfairness to part-time employees, particularly those who do not work on a Monday, when the majority of bank holidays fall. Therefore on the basis that part-time workers should not be treated less favourably than their full-time counterparts under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000, they should receive a pro-rated entitlement to all the bank holidays according to the number of hours they work, even if they do not normally work on the day on which the bank holiday falls.
2. In terms of additional bank holidays, such as those granted for the Royal Wedding last month and for the Queen’s Diamond Jubilee next year, again this depends upon the employee’s entitlement under the contract of employment. For example, contracts that state something to the effect that ‘employees are entitled to paid leave of x days in addition to all bank and public holidays’, will result in employees automatically being entitled to the extra bank holiday as paid leave.

The practical solution in order to avoid both (a) the need to pro-rata bank holidays in addition to other leave for part-time employees; and (b) to automatically having to permit employees to take an extra day’s paid leave for any additional bank holidays, is to simply specify an overall number of days paid leave entitlement for full-time employees, which includes all bank holidays falling on their normal working days, and give part-timers a pro rata entitlement to that overall entitlement.

Q What is the position in relation to holiday entitlement for an employee who is off work on sick leave?
A As a result of a number of cases on the issue, the current position is as follows:

• A worker on sick leave continues to accrue the statutory minimum holiday entitlement, even if their absence spans a complete holiday year. Employers who give significantly more generous holiday entitlement than the statutory minimum can restrict the accrual of the excess contractual holiday entitlement during sick leave provided this is clearly set out in the contract of employment.
• A worker on long term sick leave can take their statutory minimum holiday entitlement during periods of sick leave (this is likely to be requested when a worker’s sick pay has expired).
• Certainly in terms of public sector workers (and possibly private sector workers too), a worker who is on sick leave over a period of pre-booked annual leave must be permitted to take the holiday at another time, even if that means taking it in another leave year.

Q Can an employer require a worker to take any accrued but untaken leave during their notice period?
A Under the WTR, the employer has the power to require a worker to take leave at specified times, provided that the employer gives the worker notice of at least twice the length of the holiday to be taken. However, this is sometimes of little use to an employer where there is insufficient time to give the employee requisite notice in time for the leave to be taken during the notice period.

As such, notice periods can be varied by certain forms of written agreement, including a contract of employment, this issue can be dealt with by the contract containing a notice that any unused holiday will be required to be taken during the notice period, thereby removing the need for the employer to give any further notice of this requirement when an employee resigns or is dismissed.

Q What provisions should an employer consider putting in its contracts of employment/policies relating to annual leave?
A Employers should review their holiday related provisions and consider including the following if it is not already dealt with in their existing documentation: •

• The dates of the employer’s holiday year;
• Whether the annual holiday entitlement is inclusive or exclusive of bank holidays (see above the suggestion that an overall entitlement inclusive of bank holidays may be the better option);
• How any contractual leave in excess of the statutory minimum accrues both during the holiday year and during any periods of sick leave;
• The procedure for notification and approval of holiday dates;
• Any requirements the employer may have for dictating when holiday should or should not be taken;
• Any limit on the amount of leave that can be taken at one time;
• Whether any holiday entitlement in excess of the statutory entitlement can be carried forward to subsequent years;
• Whether the employer wishes to require any accrued leave to be taken during notice periods to avoid having to make a payment in lieu on termination;
• The formula for calculating payment in lieu of any accrued holiday upon the termination of employment; and
• The right to deduct any overpayment of holiday pay where the employee has taken more leave than has accrued as at the termination of employment.