For many businesses, calculating holiday pay is a straight-forward process. Employers are, within the parameters of the law, able to dictate how many annual leave days or hours a staff member is entitled to.
When the individual chooses to take their allotted time off, they simply get paid as normal.
However, in some industries the process is far more complex, with many individuals working varied hours depending on their individual contracts. In many cases, particularly within the education, care and manufacturing and engineering sectors, this includes irregular shift patterns and overtime.
Whilst this means that calculating each staff member’s holiday pay individually may seem complex or time-consuming, it is vital that it is calculated correctly. Incorrectly calculating holiday pay is an unlawful deduction of wages and can result in expensive claims that can be backdated by up to two years.
Following an amendment to a crucial piece of legislation in April 2024, many employers are still at risk of accidently miscalculating renumeration for leave. In this article, the Banner Jones Employment Law Team bring you up to date on the major changes you need to be aware of in order to calculate holiday pay correctly for workers with irregular hours and shifts.
What is the new holiday pay legislation?
The Government has created a new system of holiday accrual and holiday pay for part-year and irregular hour workers. This new system of accrual represents the most significant change to the law surrounding holiday pay and the Working Time Regulations 1998 in a long time.
For holiday years starting on or after 01 April 2024, holiday rights for part-year or irregular hours workers will no longer come from Regulation 13 and Regulation 13A of the Working Time Regulations 1998. Instead, their rights will be set out in new Regulation 15B of the Working Time Regulations 1998.
What are the changes?
The Government’s changes aim to simplify holiday and holiday pay calculations by:
- defining irregular hours workers and part-year workers.
- introducing a method to calculate statutory holiday entitlement for irregular hours and part-year workers.
- introducing rolled-up holiday pay as an alternative method to calculate holiday pay with the reintroduction of the 12.07% calculation method for determining holiday pay for individuals with irregular work hours and seasonal or part-year employment.
- introducing a method to work out how much leave one of these workers has accrued when they take maternity or family related leave or are off sick.
- removing the Working Time (Coronavirus) (Amendment) Regulations 2020 which affect the accrual of COVID-19 carryover of leave.
Is there any guidance from the Government about the changes?
To accompany the legislative changes, the Government also issued Holiday Pay guidance.
What should employers do to ensure they conform to these new regulations?
- Work out if you currently engage any part-year or irregular hours workers.
- Decide whether you wish to pay rolled-up holiday pay to any such individuals or not.
- Undertake all necessary discussions with payroll functions to make sure that your workplace arrangements are ready to administer this new system of accrual and pay.
- Review any holiday policy in place and make all necessary changes to take account of the new arrangements.
- Consider whether you need to issue revised terms and conditions of employment to reflect these changes.
Your most commonly asked questions surrounding holiday pay:
Do I need to work out each of my employees’ holiday pay individually?
Yes, you do. As time consuming as it may be, there is no “one size fits all” when it comes to holiday pay and you should work out how much each member of staff is entitled to on an individual basis.
For those on fixed hours and pay, a week’s holiday pay will simply be equivalent to a week’s wage.
However, holiday pay for those who work shifts should be calculated as the average number of weekly fixed hours they have worked in the previous 52 weeks at their hourly rate.
If your staff have no fixed hours because they are casual, part year or irregular hours workers, then their holiday pay will be calculated in hours rather than weeks, and will accrue on the last day of each pay period, at a rate of 12.07% of the actual hours worked in that pay period. an average over a 52-week reference period will be used to calculate the amount of holiday accrued during a period of sick leave or other statutory leave (such as maternity leave).
Employers will be able to choose from two systems holiday pay for such workers:
- Pay holiday when the holiday is taken, calculated at the rate of a week’s pay for a week’s holiday. A week’s pay will broadly be the average amount of weekly pay from the previous 52 weeks; or
- Pay rolled-up holiday pay as an uplift of 12.07% of the worker’s pay for work done in that pay period.
I thought holiday pay average was based on a 12-week period, what changed?
On 6th April 2020, an amendment to the Employment Rights Regulations 2018 was introduced which changed the reference period for calculating holiday pay. While the average wage used to be based upon 12 weeks, it should now be based upon 52 weeks of pay.
If your workers work more or less hours in different seasons of the year, this could quite dramatically affect how much holiday pay they are entitled to. It is important that an employee or worker is not placed at a financial detriment for taking holiday.
Note, that if your employee was not paid at all in any of the 52 weeks, you should count back to the weeks they were paid, up to a maximum of 104 weeks from the date they want to start their holiday. You should be basing your average on a total 52 weeks in which the employee received payment, but they need not be consecutive.
How do I work out a week’s pay if my staff are paid monthly?
For those employees who work the same hours and receive the same pay, you can calculate a week’s pay by multiplying their monthly pay by 12 and then dividing by 52.
Alternatively, you can calculate their hourly rate by dividing their month’s pay by the number of hours worked. Then, multiply the average hourly pay by the number of hours they work per week.
What if my employees earn commission, receive bonuses or work overtime?
If your employees earn commission or bonuses, you should include this in your calculations for holiday pay. It is not enough to base renumeration on your staff member’s basic salary; it should also take into consideration any additional payments that they receive on a regular basis.
This is also the case for overtime. Whether compulsory or voluntary, you should factor in any additional hours when calculating your employees’ average rate if the overtime is worked on a regular basis. You do not need to include voluntary overtime that is only worked very occasionally.
What else do I need to be aware of when calculating holiday pay?
It is important to remember that calculating holiday pay correctly is a legal obligation. If you disadvantage employees or workers by how you work out their pay for annual leave, you could find yourself in hot water.
We have seen a number of cases in which staff have taken legal action against their employer for an unlawful deduction of wages because they weren’t paid correctly when taking time off from work on annual leave.
If your calculations leave several workers out of pocket, then you could face a group action with a threat to your reputation and your finances!
We’re here to support you. If you have any questions surrounding holiday pay or need help with re-negotiating an out-of-date employment contract, please contact the Banner Jones Employment Law team at employment@bannerjones.co.uk
You may also be intersted in Employer Protect - for an affordable fixed annual fee Banners Jones' employment law solicitors and HR specialists can help you with all your employment law issues.
Read about other recent changes to Employment regulations in our article Navigating the recent changes in UK Employment Laws
- Director
- Solicitor
- Head of Employment Law
- KatieAsh@bannerjones.co.uk
- 01246 560519
- Sheffield - Abbey House 0114 275 5266