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Contractor Doctor: Can umbrella companies withhold holiday pay for days not taken?

Dear Contractor Doctor

I’m an IT contractor working via an umbrella company and I’ve just finished a three-year contract helping a client to build a new website. Since I have been working on the contract, the umbrella company has been deducting 12.07% each month for holiday pay.

Although I have taken holiday during the contract, and said so on my timesheets, I’ve checked back and I realise that I never received any holiday pay. And since leaving, I have also not been given any of the holiday pay I accrued over the last three years.

Can umbrella companies withhold holiday pay for days not taken?



Contractor Doctor says:

“The contractor should have been paid for the holidays he took,” explains Juliet Byrne, legal and technical director of professional employment services provider Parasol.

“Like any employer, umbrella companies have a duty of care towards their contractor employees. The purpose of the Working Time Regulations is to ensure that employees receive suitable breaks and holidays.”

Byrne strongly urges contractors to ensure that they read and fully understand their umbrella company contract of employment, paying particular attention to areas such as holidays.

That way, contractors can ensure they receive all of the employment benefits that are due to them. Contractors should also ensure that they comply with any notice requirements when requesting holiday.

Holiday pay is governed by Working Time Regulations

“In this case the contractor’s holiday pay accrued as he worked,” continues Byrne. “This means that he only received holiday pay whilst actually on holiday.

Like any employer, umbrella companies have a duty of care towards their contractor employees. The purpose of the Working Time Regulations is to ensure that employees receive suitable breaks and holid

Juliet Byrne, Parasol

“Umbrella company contractors working for a compliant service provider are employees with a contract of employment. That means Regulation 13(9) of the Working Time Regulations applies to their holiday pay.

“The regulations say that contractors must take their statutory holiday during the holiday year, and if they don’t then they lose that holiday. This is because holidays are all about health and safety. So, if a contractor doesn’t use all their holiday entitlement before the end of the holiday year, they lose that pay.”

Byrne adds that it is possible for a contractor to approach their umbrella company employer as ask if they can carry over leave from one year to the next or even to receive the pay.

While the Regulations don’t provide for this, an employer may agree if, for example the contractor has been very busy working on assignment. However, contractors must make this request during the holiday year and not after it has ended.

Rolled up or accrued holiday pay model?

Umbrella employers usually follow “rolled up” or “accrued” holiday pay models. Under the accrued model the umbrella company accrues the holiday pay, which in Tony’s case is 12.07% of pay. When the contractor takes time off, then the umbrella company uses this fund to pay the contractor when they are not working.

The other model is ‘rolled up’ holiday pay. Byrne explains: “With rolled up holiday pay, the contractor is paid for their holiday as they go along. The holiday pay is accounted for separately on their payslip so the contractor can set aside this amount each week or month to fund time off. The advantage of this approach is that the pay is not dependent upon the contractor employee taking time off.”

Byrne emphasises that the key thing about accrued holiday pay is that, unless they can come to an agreement with their umbrella company, they must take time off. If a contractor does not take enough holidays during the year, then they lose the accrued pay.

Accrued holiday pay can be paid out on termination

Based on the information Tony has provided about his circumstances, he will have lost the accrued holiday pay for the first two years of his contract.

As noted, it’s important that employees like Tony give notice of holidays as required by their contract. This will probably involve telling both the umbrella employer and the client.

However, on a more positive note Byrne believes that Tony should receive any accrued for the past holiday year: “If a contractor’s holiday year is 1 January to 31 December, and they leave in September without taking any or all their holiday, then the Working Time Regulators require their employer to pay out any accrued holiday pay on termination of the contract.

Assuming he has worked on his contract from January to September, Tony should receive the holiday pay, 12.07% of his pay earned since the start of the holiday period, in a cash lump sum when he terminates his contract.

If holiday terms are not met, then contractors can go to tribunal

If a contractor’s umbrella company withholds holiday pay that is legitimately due then the contractor can take further action.

Byrne explains: “As with any other employer, if an employee believes that they have not been paid properly, they have three months following the end of their employment to bring a tribunal claim.

“The first step will be a pre-claim mandatory conciliation stage with ACAS. If this does not result in a settlement, then the contractor can pay a fee and take their former umbrella company to an employment tribunal.”

Check employment contracts and take holiday

Byrne notes that Tony’s case is actually relatively unusual: “Not many umbrella company contractors remain so long in a single contract and allow such a large amount of holiday pay to accrue. Most umbrella company contractors regularly change assignments, so work receive unpaid holiday when they’re on holiday.”

“But this example underscores how important it is for contractors to check and understand their employment contract.”

“Lower earning contractors should also check that the accrued holiday pay is paid in addition to the national minimum wage (NMW). Accruing holiday pay must not take an employee’s hourly rate below NMW.”

Byrne concludes: “If like Tony a contractor was not paid for holiday they took at any stage of their employment, it should be possible to recover it, if necessary by bringing a tribunal claim. That claim also has to be brought, or conciliation started, within three months of the end of employment.”


Published: 21 October 2014

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