The Holidays Act 2003 is a complex piece of legislation which can be hard to interpret and understand. A common scenario which is often the subject of confusion between employers and employees is where an employee returns from parental leave and wants to take annual leave. In this circumstance the Parental Leave and Employment Protection Act 1987 adds an additional layer of complexity.
People firstly need to have the understanding how annual leave entitlement works under the Holidays Act 2003. From the outset of employment an employee 'accrues' annual leave every day up to their first anniversary of work a year later. At that point they become entitled to 4 weeks' paid annual leave.
An employee does not have a right to take annual leave, unless mutually agreed with the employer, i.e. annual leave in advance, until after they have worked an entire year and their anniversary date rolls over.
Annual Leave Payment in Normal Circumstances
When an employee takes annual leave entitlement at that point a calculation must be done, and the annual leave must be paid at the higher rate of either:
- 'Ordinary Weekly Pay'; or
- 'Average Weekly Earnings'.
Annual Leave Payment up to 12-months after Returning from Parental Leave
If an employee still has an annual leave balance that they became entitled to prior to leaving for parental leave, then they are paid just as normal (up to the amount of their balance). Namely, any annual leave entitlement they had prior to going on parental leave will remain at its full value and calculated in accordance with the usual calculations in the Holidays Act 2003, i.e. the higher of 'Ordinary Weekly Pay' vs 'Average Weekly Earnings'.
If the employee didn't have any annual leave entitlement (which is often the case because most employees tend to exhaust it before going on parental leave), and they become entitled to annual leave while they are off on parental leave and/or within the first 12-months following their return from parental leave, then the employer can apply only the 'Average Weekly Earnings' approach, or formula for determining payment. This is based on the previous 12 months of the employee's gross earnings when it comes to paying annual leave. To that end, there is no obligation to do each of the standard calculations noted above and select the higher rate when paying annual leave.
The above can often be a shock for an employee going wanting to take paid annual leave in these circumstances and finding their holiday pay is significantly lower what they have been used to in the past. While the above is what is required as a minimum under law, some employers have policy which commit to paying 'Ordinary Weekly Pay', i.e. applying the usual calculations and paying their employees at a full value for their annual leave in these situations. However, this approach is an enhancement, or step over and above what the law says an employer must do.
This is one of the issues the Government Task force is likely to look at in their current review of Holidays Act 2003 - it is expected that the Government will release the proposed changes which are aiming to simplify the existing legislation and remedy many of the problems employers contend with in September.