• Date

    04 Sep 2023
  • Category

    HR Consultancy Services
  • Author

    Hannah Jane Dobbie

Navigating holiday entitlement and pay complexities

With employment legislation continually being updated, businesses need help to navigate their way around this minefield to ensure that they are both compliant and doing the right thing by their employees. We know that a simple question can soon escalate, especially when it comes to holiday entitlement, holiday pay, and the associated calculations.

 

Why is there such a big issue over holiday entitlement and holiday pay calculations?

Firstly, and following case law towards the end of the last decade, businesses had to start including commission and bonus payments (if they were regular and contractual) and overtime (whether voluntary, compulsory and/or non-guaranteed) in holiday pay, as well as shift enhancements and additional allowances such as for unsociable hours or travel. This ensures the accurate calculation of an average week’s pay based on normal remuneration over a 12-week period prior to the holiday being taken.

In April 2020 the reference period for calculating an average week’s pay changed from 12 weeks to 52 weeks (or up to 52 weeks for those that have been there less than a year).

Finally, the outcome of the Harpur v Brazel case last year created confusion for workers not working a full year. This led to the so-called “calendar week method” being brought in as the currently accepted way to calculate holiday and pay, replacing the “12.07% method”. The application of this new method applied to part year (including teachers) and irregular hours workers, including zero hours, casual hours, and seasonal workers.

While the Government produced guidelines to assist with these transitions, there has been a struggle to understand them, as, although comprehensive, they do not give the clarity that employers need.

A consultation was held earlier this year seeking views on proposals for pro-rata holiday entitlement for part-year and irregular hours workers based on the hours they work. Government proposals, if enacted, could see a return to the 12.07% method for determining entitlement - albeit with some changes to how the holiday pay is calculated. The outcome of the consultation is yet to be announced, leaving many employers in a state of confusion.

 

What holiday am I entitled to?

All workers are entitled to a minimum of 5.6 weeks in the UK, which is made up of 4 weeks from the EU directive and a further 1.6 weeks from the UK regulations. This equates to 28 days for full time workers, but this figure can include bank holidays. It may be shown as 28 days or 20 days plus the usual bank holidays.

Holiday is pro-rated for part time workers based on hours worked. If you work a fixed 4 days a week, every week, you still get 5.6 weeks where a week is a normal working week, or 22.4 days. If the company chooses to offer more holidays, this is additional or contractual holiday pay.

Most of the legislation surrounding holiday entitlement and pay only applies to the first 4 weeks or 20 days of the statutory minimum, which can make it confusing for employers.

 

Am I entitled to bank holidays?

There is no law that says you must be given paid time off on bank holidays, and it depends on how your contract is worded as to whether you have 28 days including bank holidays, 20 days’ leave plus the bank holidays when they fall, or indeed that you are required to work on bank holidays and take the equivalent days off at another time.

Part timers are entitled to pro-rated bank holidays. If you work part time including a Monday, and a bank holiday falls on one of your working days, you will need to book it off as leave, even if this means you are allocating more of your overall entitlement to bank holidays than say a colleague who works the same hours as you but on different days of the week, not including a Monday.

 

What holiday pay am I entitled to?

You are entitled to your ‘normal average pay’ while you are on holiday. If you are full time on a standard contact, you will receive your normal salary while on holiday. However, if you work variable hours, your average weekly pay will take into account any paid overtime, bonuses, commissions, and other allowances.

The requirement to account for these additional payments only applies to the first 4 weeks of the statutory minimum holiday however, not the full 5.6 weeks’ leave we have in the UK. This can lead to confusion and some employers have decided to apply it to all 5.6 weeks or to all contractual holiday to avoid any inadvertent underpayments.

 

I am part time and work overtime; do I get additional holiday?

If you have fixed hours and work overtime, your holiday entitlement remains as per your statutory or contractual entitlement, but your holiday pay may well increase, as this is calculated based on your average weekly pay over the previous 52 weeks.

 

I am still using the 12.07% method but not sure what that really means or if I should change?

Technically yes, you should be moving to the calendar week method, but the view of many, is that if you change to the calendar week method now, you may have to revert to the 12.07% method once the outcome from the consultation is published and becomes law. Therefore, you may decide to stay with what you are doing, and just deal with any one-off queries or challenges if they arise. You do however need to accept that an unlawful deduction of wages claim could be brought for incorrect holiday calculations.

The 12.07% method is best explained as follows: Workers get a minimum of 5.6 weeks’ leave each holiday year. The 5.6 weeks equates to 12.07% of the normal hours worked in a year, as 52 weeks - 5.6 weeks = 46.4, and 5.6/46.4=12.07%.

To calculate holiday using this method, we would look at the number of hours worked in any given month and multiplying this by 12.07% to get the number of hours and minutes of holiday entitlement accrued for the month.

 

How does the calendar week method work?

It was determined in Harpur v Brazel that part year or seasonal workers should be entitled to the full statutory minimum of 5.6 weeks’ paid holiday a year and this should not be reduced on a pro-rata basis if they only work part of the year.

Entitlement is therefore a given, but a worker’s pay must be averaged over the previous 52-week period to calculate their holiday pay. Only the weeks actually worked are considered for the calculation. This method involves a pay calculation to be carried out each time holiday is requested, as average weekly pay will naturally vary considerably across the year.

 

Is rolled up holiday pay illegal?

No, it was never legislated for, but is still not the recommended approach. However, many employees on zero-hour contracts prefer to have holiday pay paid monthly or quarterly and just not be available for work if they have a holiday. As long as holiday pay is calculated correctly and shown separately on the payslip it is not unlawful.

 

We changed to the calendar week method from the start of the year – will we have to change again?

If you have changed to the calendar week method, then you should continue using this method until such time that we have a definitive set of guidelines or new legislation from the Government.

 

We are here to help

Our HR Consultancy team work closely with our payroll team to support clients whose needs go beyond the remit of pure payroll. We help our clients ensure they adhere to both current employment legislation and HR best practice, providing bespoke advice, guidance, and support on documentation, employee relations issues and anything else that might fall under the remit of HR.

If you have any questions in relation to holiday calculations/pay or in relation to HR advice and support generally, please get in touch with a member of our specialist HR Consultancy team or your usual Azets advisor.

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Hannah Jane Dobbie

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Hannah Jane Dobbie

Head of HR Consultancy Maidstone

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