The UK holiday pay regime has been around for some time and most UK payroll managers, HR directors, and SAP Payroll administrators seem to be aware of it. However, whilst some organisations are already using the new calculations, many employers still haven’t taken any action to change their processes or SAP payroll systems (Employee Central Payroll and on-premise SAP Payroll are affected in the same way). The reason for this is quite often that they are confused about the vagueness of the court rulings or that they are waiting for SAP to provide a convenient solution that they can then just switch on.
Some employers considered themselves on the safe side, declaring all overtime as “voluntary”, but a recent court ruling has killed that argument. Overtime and on-call compensation, it has been ruled, can be relevant for holiday pay calculation, even when voluntary.
This article takes you through the considerations and options in SAP HCM Payroll or Employee Central Payroll. iXerv also offer an accelerator-based workshop and template-based technical solution. If you are interested, just get in touch here or check out our fixed price package here.
It may look complicated, but doing nothing is probably your worst option
Most experts acknowledge that the current situation is somewhat vague, but also emphasise that it is unlikely that more clarity will be brought into it any time soon. Instead of doing nothing, employers should analyse the existing rules in their particular context and establish a reasonable process to amend their holiday pay. Even at the risk of having to change details as they go along, taking action would protect them from serious loss of trust from their workforce. Employees already hear from family and friends who are already enjoying a nice top-up of their salary when they go on leave, and they will feel cheated by their employer if they don’t get it as well. And that’s not even considering legal firms, who may pick this up as a money-making opportunity like PPI and start calling your employees to “help” with legal action or HMRC reviews focussing on holiday pay in particular.
We found that getting your SAP Payroll experts on board early in the discussion can help:
- Avoid costly and difficult to manage processes, when other options are available
- Get some structure into the discussions and make sure legal experts give you the answers you need to set up your new process (I have the highest respect for the legal profession, but they sometimes struggle with the concept of “you have to tell the computer, whether it’s yes or no – there is no ‘maybe’ in the digital world”).
Getting the answers you need to set up your process and SAP HR Payroll
Questions you need to ask fall into 4 major categories as explained by my former colleague Hannah Smith from iProCon in this blog article:
- Which days are to be paid with the new uplift?
- Which amounts go into the calculation and which number of hours or days are they divided by to calculate the average?
- Which period of time is to be considered for this calculation?
- How do you communicate to your employees (starting with how to show the uplift on the payslip)?
Level 1 Analysis
This section is to guide you through the high-level analysis along the guiding principles of the court rulings:
- Which overtime and other ‘regular payments’ do you want to be included in holiday pay?
It is up to your company to interpret the government guidance as to which payments go into the holiday calculations – such On Call payments, Commissions or First Aid Allowances, etc. To make this relevant, you need to go down to the level of SAP wage types here.
- Average for this pay to be calculated over a 12-week period before the holiday
Some organisations take this quite literally. Others are more pragmatic to allow for easier automation in SAP. There are two main options here. You can choose to calculate with 3 full calendar months before the absence, or be exact with the 84 days before the day the absence starts. The second option would be far more complex to implement in SAP or most other payroll systems, because values in payroll results are usually full months. And yet, you could add more complexity if you wanted to. Some organisations decided to exclude periods the employee has unpaid leave from the calculation and use older periods instead. Some customers with a highly cyclical business where overtime doesn’t distribute evenly across the year have chosen to use full calendar years only.
- The additional holiday pay is to be paid for the first 20 days of holiday for your employee
The ruling states that the uplift must be paid against the first 20 days of the holiday of the year, and many companies may choose to be more generous and apply the uplifted rate to all holidays. If you do want to pay for the 20 days only, then you need to find a way of only applying the uplift to just those days. You might want to work with extra time quota here.
Here are just three key items/questions to get you started:
- How you manage your employees’ leave in SAP HR now may raise further questions, such as whether you allow employees to carry over any unused leave from year to year.
- Where does this fit in? Does the carry over attract any of the uplift?
- Do you have the overtime hours going into a bank account until month end? How should these hours be handled?
Apart from those questions, you also need to establish what to do for the past, as it is likely your employees have a claim to receive an uplift for holidays taken before your solution goes live.
Why there can’t be a fully standardised solution for UK holiday pay in SAP Payroll (PY-GB)
As indicated above, there are choices you can make in the way you calculate UK holiday pay and these will be reflected in different possible setups in SAP UK Payroll. Also, the context of your existing setup will influence the changes required.
SAP Payroll already offers options to configure absence payments based on averages and it’s quite common in some countries (as someone, who started his SAP HR career in 1990s Germany mostly in the manufacturing industry, I kind of grew up with average payments). These configuration options are sufficient for some of the interpretations we’ve seen employers choose. So, SAP can argue (and rightly so) that their payroll system is ready to deal with the legal requirements, if configured correctly.
For some contexts and ways of interpreting the legal situation and also for simplified end user processes, custom programming may be required. Other organisations may be happy with a pure configuration based solution.
Options for implementing UK Holiday Pay in SAP HCM Payroll or Employee Central Payroll
While there is no out-of-the-box solution for the new UK holiday pay out there in SAP Payroll, there are standard SAP functions that might provide the answer; alternatively, custom functionality could be the best way forward for you.
First, how do you want to calculate your averages for payment? There are two SAP Payroll functions that can do this: AVERA and MEANV. Both functions calculate averages. MEANV is the ‘old’ processing of averages and AVERA is the ‘new’ processing. SAP recommends using AVERA since it can use partial periods if you want to calculate the averages for the 84 days before the absences and deal with change in pay periodicity and off-cycle payrolls. Sounds like a solid option right? But using the AVERA function is going to need a retro to build the averages base. Running such a retro in your payroll could cause problems of its own and wouldn’t be something we would necessarily recommend.
On the other hand, MEANV is not going to be as flexible as using AVERA, but it can access the relevant wage types directly without cumulations, so it is not going to need that retro that AVERA would. This still might not work for all your scenarios, or it might back you into a corner in terms of configuration if there were further changes to the legislation or your company’s policy on the matter, so a custom function or operation (see below) might be your choice to keep all options open.
Second, on which days will you pay the uplifted holiday pay, and do these need to be differentiated from other holidays? If so, you’ll need a different Absence Type and therefore probably a different Absence Quota to apply the different rates of pay. The rulings stated that the uplift had to be paid for the first 20 days of holiday in that year. Many companies will be looking to pay the uplift on all holidays, which makes the configuration a little easier and calculations a bit more transparent.
You might need to head down the custom function road. No matter how and what the averages you need calculated or the absence days this should be applied to, this can all be coded to meet your needs. However, doing so is going to require a developer who really understands SAP Payroll – or even better, a SAP Payroll specialist who’s good at ABAP. And you should make sure that you test, test and test again across all your possible holiday pay scenarios.
Finally, once you have the values and the days to pay for, you’ll need to think about how to clearly show this on a payslip. A wage type on the payslip with the number of hours and the uplifted rate should be enough for employees to see when and how much the uplift has been paid for. If you chose a custom function route, remember to document extensively and create Wage Types for interim results along the calculations steps where you can. When employees can clearly see what has been calculated and paid, you also then need to be able to explain any questions for them!
Whichever SAP Payroll configuration or development road you need to head down for your holiday pay solution, each comes with its own merits, and its own downsides.
The interesting cases – challenging your payroll process and SAP HR system
When talking to customers so far, we’ve come across quite a few interesting situations already and it is important that you make conscious decisions for these cases together with your legal experts. The “peculiarities” we’ve seen comprise:
- longer relevance periods due to seasonal business (easy)
- overtime not paid directly, but monthly or annually based on banked hours accounts (possibly difficult in process and communication)
- leave entitlement built into the shift pattern (probably requires custom code)
- using in-period values (as paid) rather than for-period values (i.e., payments for overtime in the relevant period, no matter when paid). This is the worst option we’ve seen so far. Sure, it can be programmed, but it is open to manipulation and is not transparent.
As already mentioned above, you may have to make changes as you go along and as more court cases emerge, but at least you can’t be blamed for doing nothing. In case of doubt, we’d recommend to go with the simpler and more transparent process for now, and only add complexity later if it turns out it is definitely legally required.
Our SAP payroll team at iXerv offers a fixed package for a lean implementation of the new holiday pay in your SAP HCM or Employee Central Payroll system – or further help if you make more complex choices or need extra support.
Stephen Schwabe is SAP UK/Ireland Payroll Lead at iXerv. He has twenty years SAP experience, the last fourteen as a HR/Payroll Functional Consultant and the six years prior to this as an ABAP consultant. Prior to working with SAP, he was a programmer analyst in COBOL, LINC and Assembler environments for 8 years.