All employees are entitled to holiday pay, so employers must calculate it for all their workers, but that’s not so easy for those without fixed hours or pay.

Holiday pay must be paid, because workers should not suffer financially for taking holiday, so it is important to understand the process. Unless a worker is self-employed, almost all workers are entitled to 5.6 weeks’ paid holiday a year. The amount paid for holidays depends on the number of hours an employee works and how they are paid. But if someone receives, for example, £100 for a weeks’ work, they should receive the same amount when they take one weeks’ holiday.

It’s important to remember that holiday entitlement accrues whilst a worker is on sick leave, maternity leave, parental leave, adoption leave and other types of statutory leave. A worker may request holiday at the same time they are on sick leave. Where the situation becomes complicated is when a worker does not work fixed or regular hours and, therefore, does not receive the same amount of pay each week. If this situation applies to members of your workforce, you, as the employer, should look back at a worker’s previous 52 paid weeks (known as the holiday pay reference period) to calculate what that worker should be paid for a week’s leave.

Advice is available on the GOV.UK website but note that guidance refers to workers on the legal minimum holiday entitlement of 5.6 weeks’ paid holiday. Perhaps your staff have contracts entitling them to more than that. If so, take that into account. Workers and employers can also refer to Acas for advice, but we are also here to help.

Times – and laws – change

It’s important to remember that the law on holiday pay changed on 6 April 2020, and when the law changed, the reference period increased. But what does that mean? It means that previously, where a worker had variable pay or hours, their holiday pay was calculated using an average from the last 12 weeks in which they worked. This has now been increased to 52 weeks.

My employee has only been with us for a few months…

If a worker has not been in employment for long enough to build up 52 weeks’ worth of pay data, their employer should use however many complete weeks of data they have. If a worker takes leave before they have been in their job a complete week, then the employer has no data. In this case the reference period is not used. Instead, the employer should pay the worker an amount which fairly represents their pay for the length of time the worker is on leave. To do this, you should consider the worker’s pay for the job, the pay already received by the worker – if any – and what other workers doing a comparable role for you (or another employer) are paid.

Previously employers looked back as far as necessary to get to 12 weeks’ worth of pay data to complete the reference period, but from 6 April 2020, to prevent employers having to look back more than two years to reach 52 weeks’ of pay data, a limitation on how far back employers should look was introduced. Any weeks before 104 complete weeks (two years) prior to the first day of the worker’s holiday are not included. In this case the reference period is shortened to however many weeks are available in this 104-week period. Employers should still only count back as far as is needed to achieve 52-weeks’ worth of pay data if this is less than 104 weeks. There are example available on GOV.UK

What’s a week?

The Employment Rights Act 1996 states that a week starts on Sunday and ends on Saturday. The holiday pay reference period should start from the last complete working week that was worked ending on or before the first day of leave, starting on a Sunday and ending on a Saturday.

There is an exception for workers whose pay is calculated weekly by a week ending on a day other than Saturday. In these cases, a week is treated as ending with that other day. For example, if a worker’s pay is calculated by a week ending with a Wednesday, then the employer should treat a week as starting on a Thursday and finishing on a Wednesday. The holiday pay reference period starts from the last whole week ending on or before the first day of the period of leave. This will typically be a week from Sunday to Saturday, but it could end on another day of the week if a worker is paid on a weekly basis.

For workers who are paid monthly but where their pay varies, the employer will need to use the holiday pay reference period. In most cases, it will not be possible to use 12 months of pay data, as it will not correspond accurately with a 52-week holiday pay reference period. This is because 12 months does not accurately align with the 52-week reference period required by legislation. If a worker is not paid weekly, it is still important to be able to work out what their pay is each week. This is because a weekly pay figure is used to determine holiday pay via the reference period. The concept of weekly pay is used in legislation because it is always the same length, while the lengths of months and years, change.

If a worker without normal working hours but a fixed hourly rate of pay is paid monthly, the employer should calculate their weekly earnings by using their records of hours worked. For workers with no normal working hours and a variable rate of pay, it may be necessary to use an average hourly rate to estimate a worker’s weekly rate of pay. When use of an average hourly rate of pay is necessary, the weekly rate of pay can be calculated by multiplying the hours worked in a week by the average hourly rate of pay.

Zero-hours contracts

Workers with irregular hours or zero-hours contracts are entitled to paid holiday.  For casual workers with no normal hours, including workers on zero-hours contracts, the holiday pay they receive will be their average pay over the previous 52 weeks worked. The reference period must include the last 52 weeks for which they actually earned, and so excludes any weeks where no work was performed. This may mean that the actual reference period takes into account pay data from further back than 52 weeks from the date of their leave. However, it should go back no more than 104 weeks; if this gives fewer than 52 weeks to take into account, then the reference period is shortened to that lower number of weeks.

A paid week will include a week in which the worker was paid any amount for work undertaken during that week. Only if no pay at all is received in a week, should it be discounted as part of the 52-week reference period.

Short contracts or temporary workers

Contract workers or temporary workers, including temporary agency workers, are also entitled to paid holiday. Short contract, temporary or agency workers should receive holiday pay in the normal way.

If the worker does not take their accrued holiday entitlement by the time they leave, they should be paid for it, and it should be calculated by working out the individual’s remaining holiday entitlement and then working out their holiday pay for this period. Employers should remember to deduct any holiday taken from the total holiday entitlement to correctly calculate the remaining holiday the worker is entitled to. If a worker has taken a period of leave within the 52-week reference period, then any weeks on which no pay was due, should not be included. Instead, additional earlier paid weeks should be included to achieve the 52-week total.

Redundancy & Insolvency

Where a worker is made redundant, they are entitled to be paid for any accrued but untaken holiday and any holiday taken but unpaid up to the point of redundancy.

When an employee is made redundant by an insolvent employer, they are still entitled to pay for holiday accrued but untaken, or holiday taken, but not paid for. Where the employer enters a formal insolvency process, the employee can make a claim to the Insolvency Service’s Redundancy Payments Service, to reclaim the money owed, although the amount the Insolvency Service can pay is subject to statutory limits. The Insolvency Service will pay-out accrued but untaken holiday and holiday taken but not paid, up to a maximum of 6 weeks. Holiday pay in this situation must still be calculated as previously explained, over a 52-week reference period. However, pay for a week of holiday is capped subject to section 186 of the Employment Rights Act.

Operationally, the workers’ holiday pay must be correctly calculated. If it then exceeds the limit in section 186 of the Employment Rights Act 1996, it will then be reduced to that limit prior to the Insolvency Service making the payment to the worker.

Term-time (and seasonal) work

If the term-time worker has a full-time, permanent contract, it is likely that they will be paid their normal weekly rate of pay all year round, including in non-working weeks. For teachers, this would include during the school holidays (typically 13 weeks of leave per year). Equally, if the term-time worker has a part-time permanent contract, they will also likely receive their normal weekly rate of pay all year round.

For these workers, if they receive their normal weekly rate of pay during the time when they are not working, this can be counted towards their statutory holiday pay entitlement. If they receive at least 5.6 weeks of paid time off work, this will be enough to cover their full statutory holiday entitlement and associated pay. If they do not have enough paid non-working weeks, they will need additional weeks leave to cover their statutory holiday entitlement. Similarly, if they receive a lower rate of pay on non-working weeks, this may not be sufficient to reach 5.6 weeks’ worth of their normal pay level for the purposes of holiday pay. However, if they only receive pay during the periods that they work and not during their non-working periods, their employer will need to ensure that they are paying the requisite holiday pay.

In such cases involving variable pay an employer should apply a 52-week holiday pay reference period to calculate the correct amount of holiday pay. The reference period should ignore any whole weeks in which no pay was received, and count only weeks in which pay, however minimal, was earned.

Confused? Don’t be.

Find out how we can help, email chris@cdcaccounting.com or call 01978 861196