The area of umbrella company holiday pay has come under increasingly close scrutiny and as a result is becoming a major discussion point across many contractor forums and websites as it would appear that this is either not being handled correctly or there is a lack of transparency on the arrangements with the workers.
Professional Passport has clear standards that any of our approved providers must adhere to, these fall in to 4 key areas:
1. Contractual Terms
2. Qualifying Pay
3. Payslip Requirements
4. Payment on Leaving
In all cases we insist that holiday pay is always defined within the employment contract as being accrued. Rolled up, or advanced as some refer to it, is unlawful even though there are accepted conventions around this.
Where an employee wants their holiday paid to them automatically with each pay run, which the majority do, we require a specific written request signed by the worker to support this request. This instruction must also make clear what is being requested and the consequences of such a request, i.e. there will be no further holiday pay available for the worker during periods they are not working. The worker also has the ability to change this back to accrued holiday at any time.
The employment contract will also specify a ‘Holiday Year’ where any accrued holiday must be taken within this period. Failure to take accrued holiday during the year can result in the worker losing their entitlement. This was often a way that some providers gained significant sums where workers failed to make these claims, usually as they were unaware of the terms within their employment contracts. This is an area where Professional Passport’s compliance standards go further; we require our providers to write to any employee, with a positive balance in their holiday fund, each month in the 3 months leading up to the holiday year end to specifically state that if the holiday is not taken before the end of the period it will be lost. We also require all pay statements to clearly show any holiday pay entitlement to the worker.
This enhanced level of transparency to the workers ensures they remain fully informed, even where they have failed to read and understand the terms of their contract.
Following rulings through The European Court of Justice it is now accepted that holiday pay should be calculated on the gross taxable earnings of the workers. Many umbrella companies structure their contracts to have a salary, usually aligned to NMW, and a bonus payment. In the past holiday pay was calculated on just the salary element but following these rulings providers moved the calculation to cover both salary and bonus elements of the pay.
When paid to the worker, whether rolled up or accrued, the full allocation should be made, generally 12.07% of the qualifying earnings. A provider cannot deduct margin or employment costs from this amount.
Professional Passport compliance standards require providers to calculate the holiday pay on all elements of gross taxable pay. It also ensures that the workers receive their full allocation with no deductions for margin or costs of employment.
Holiday pay, when paid, should be shown as a specific line on the payslip clearly identifying it as holiday pay.
Failure to do so could leave providers exposed to challenges from their employees who would claim to be unaware their regular pay included holiday pay.
Professional Passport compliance standards require providers to itemise holiday pay separately on the workers’ payslips.
Payment on Leaving
It is a requirement of Professional Passport’s compliance standards that any outstanding holiday pay balances are automatically paid to workers on leaving.
Some providers have clauses in contracts requiring workers to specifically request this on leaving for it to be paid, in many cases the request is not made.
Professional Passport would not approve any provider operating in this way.
For further information you can also view the Factsheet produced by PRISM and The Low Incomes Tax Reform Group.