Changes to Holiday Pay Calculations

Since the recent Supreme Court ruling on holiday pay, in Harpur Trust vs Brazel  there has been much discussion in the industry around holiday pay calculations for part time workers, and changes to holiday calculations have been announced, but holiday pay calculations can be a minefield even for full time workers.

Many employers and payroll professionals have used the 12.07% method for calculating holiday pay but this has now been confirmed the regulations do not allow for holiday pay to be calculated using this 12.07% method.

The decision in the recent case was specifically around part-year workers, for example, those who work in schools. The ruling said that those permanent workers who work a part year are still entitled to the full 5.6 weeks of holiday. Furthermore, if they work irregular hours, the pay reference period has been extended from 12 to 52 weeks, excluding any weeks not worked.

The Court acknowledges that this means part-year workers are in a more favourable position with regards to their holiday than full time workers, so you’re not alone if you feel that this is an unfair ruling!

 

How do I calculate holiday due?

Remember, employers must give employees the statutory minimum holiday, and should not pay employees instead of them taking their minimum holiday entitlement – except when they are leaving employment. If contractual entitlement is higher than statutory, employers are permitted to buy back any additional holiday from the employee.

Calculating holiday pay due:

1.Check the employer’s holiday year

Is it in line with the calendar year, the tax year, the company’s fiscal year, or another date entirely?  Make this part of the onboarding pack for new employers.  In the absence of any formal written notice by the employer, the calendar year should be used.

2. Check the employment contract

How does the contract deal with bank/public holidays?  Does holiday entitlement include bank holidays, or is it stated as entitlement plus bank holidays?  This is a really crucial point as can be seen in example 1 below.  Again, in the absence of this, it should be assumed that the holiday entitlement includes bank holidays as the statutory minimum is 5.6 weeks and bank holidays are not a statutory right.

3. Work out how long in the holiday year the employee has been working for the employer

Prorata the holiday entitlement.  Unless the contract specifically states a calculation method, you should use the number of days worked in the calendar year.  HMRC provides an online holiday calculator which can help with this.

4. Deduct any holiday already taken in the year from the above calculation

Remember, if the holiday entitlement includes bank holidays and the worker is a regular Mon-Fri full time employee, bank holidays need to be taken into account.

Example 1: Employee leaves on 30th April after 3 bank holidays, the employer’s holiday year runs 1st Jan to 31st Dec and it’s not a leap year. The employee has taken 4 other holiday days.

  • Their statutory entitlement of 5.6 weeks is stated as including bank holidays.  Therefore their holiday entitlement is (28 x 120 / 365)=9.21 days. They’ve taken 3 bank holidays plus 4 others, so are due to be paid 2.21 days
  • Their statutory entitlement is stated as 20 days plus bank holidays. Therefore bank holidays are ignored for holiday pay calculation. Their holiday entitlement is (20 x 120/ 365)= 6.57 days, they have taken 4 days so are due 2.57 days.

What about a worker with irregular hours?

Zero hour contracted workers are also entitled to statutory leave of 5.6 weeks.

The calculation looks at the average hours for the previous 52 weeks worked, ignoring completely any weeks where they didn’t work at all. You should look back up to 104 weeks in order to get up to 52 weeks worked for the correct average hours. You would include any holiday weeks at the number of hours taken.

The employee is entitled to take holiday anytime in the holiday year and they should be paid at their current rate, so when they accrued the hours is not relevant, only the current rate of pay.

Planning tip: Advise employers to ensure the employee has taken all their relevant holidays before giving them a pay rise.

Example 2: Employee starts working for the employer on 3rd January and leaves on 29th April so they have been employed for 117/365 days. During that time, they only work for 4 weeks, 2 weeks at 25 hours, one at 15 and one at 40 hours. Their average weekly hours are 26.25 so their total holiday entitlement for the year is 147 hours (being 26.25 * 5.6weeks).  For the period worked it’s (147 x 117 / 365) = 47.12 hours.  This is 28.8% of the total hours worked – a lot more than the 12.07% which has been the calculation method for a long time; and a lot more than the equivalent full-time employee is due.

Planning tip: Advise employers to ensure they are offboarding employees that they aren’t utilising and only keeping employees on the payroll that are working.

Planning tip: You could also suggest to your employers that, instead of having zero-hour contracts, they have a 0.25 hour contract.  They could request that the employees always log in to record their zero hours once a week, and allocate, say 15 minutes a week paid for this task.

Using example 2, if the employee had been paid for 0.25 hours each week that they weren’t working, this brings their average down to 11.43 hours, which is 12.04% of actual hours.  They will have been paid another 3.25 hours, so in total they are due 14.68 hours, a lot less than the 47 hours calculated above but they are still in a better position than with the traditional 12.07% calculation.

How do irregular workers claim holiday?

As you cannot pay workers for holiday, and therefore need to give them the time off, best practice is to review the holiday allowance accrued once every three months, and request that they take that time off, then pay them for it.  Remember, as an employer, you can decide when your employee takes holiday.

Planning tip: When calculating average weekly hours worked, you must include any weeks taken as holiday and include them in the average hours. Advise your employer to request that the holiday is taken over more than one week, to reduce average weekly hours.

We have created a holiday calculator sheet to calculate holiday pay for irregular workers. This is available for you to download here. Simply change the date in the first week, then put in the employee’s weekly hours. You’ll see when 52 working weeks are reached, the cell will be highlighted for ease of use.

 

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