Update on Calculating Holiday Pay

We know that many people are still struggling to get their head around what this means for their business in practice. To support with this challenge, we have reviewed the matter further and have put together the below recommendations.

Recap – What is the change to calculating holiday pay?

A recent change to managing holiday pay has found using the 12.07% rule means some individuals will receive less holiday pay than they are owed according to the working time regulations, which demands a minimum of 5.6 weeks of annual leave each year. Therefore, the 12.07% method may penalise those who don’t work for periods within the holiday year, for example, term-time workers and those on zero-hour contracts

To counter this, the best way to calculate annual leave is to assume a minimum of 5.6 weeks of annual leave in each complete holiday year. Pay for this time can then be calculated using a ‘52 week’ average, where any weeks not worked are discounted. If data for 52 complete or worked weeks is not available, you will need to use the data they do have available.

Our advice & recommendations

This new case law makes it increasingly difficult for businesses to retain employees permanently on a zero-hour basis. We expect this same train of thought to extend in the future as further cases are brought in front of employment tribunal. As a result of this, we would recommend you review your current practices and take the following action now:

• Remove reference to the 12.07% method from your HR documentation. This method has been shown to detriment those who work for only part of the year and should no longer be used to calculate annual leave entitlement or pay. Those on a permanent contract will be entitled to a minimum of 5.6 weeks paid annual leave, regardless of the amount of work they do. We would recommend instead outlining a minimum of 5.6 weeks’ holiday entitlement.
• Avoid zero-hour contracts where possible. As the use of permanent zero-contracts increase the risk of miscalculating annual leave, it is better to avoid wherever possible. We would recommend reviewing the contract of anyone you have detailed as a zero-hour employee and, wherever possible, they should be moved to a more structured employment contract i.e., 8 hours per week.
• Offer on a fixed-term basis. If a zero-hour contact is the only way for you to organise your staffing structure, we would encourage you to do so on a fixed-term basis only. This will protect the business from the employee making a claim to the full year’s holiday entitlement and encourage the relationship to be reviewed regularly.
• Seek further advice. This particular change in employment law is very challenging and doesn’t translate into practice easily. Therefore, we would encourage you to reach out for further support if you have any concerns or would like to discuss your own circumstances further.

WHAT IS THE RISK IN NOT ACKNOWLEDGING THIS CHANGE TO HOLIDAY PAY?

• Some may argue it is unlikely to affect them as employees are unlikely to be aware of the change. However, although it is true this recent change is confusing and has been overshadowed by other concerning news items at the moment, it is likely further cases will see this become common knowledge for your employees in due course.
• The risk for your company in delaying action is that anyone impacted by the change (effectively part-year workers whose holiday entitlement has been calculated on a pro-rata basis) has the potential to raise an unlawful deduction from wages claim. This would amount to the difference between their pro-rata holidays and the full-time annual leave equivalent for your business.
• This type of claim can be raised at any time during their employment or within three months of receiving their final pay when leaving the business. Once made, it can be backdated by up to two years.
• For example, an employee on a permanent zero-hour contract who has only worked one week out of the year is still entitled to 5.6 weeks of paid annual leave under this latest change. This means your business could be challenged and made to pay a disproportionate amount of holiday for the hours actually worked.
• What if I am using zero-hour or term-time contracts at the moment?
• If you are currently employing people on permanent zero-hour contracts or term-time contracts, it will be important to review this practice and seek advice relevant to your business. There are some instances where this will be continue to be appropriate, therefore, we would encourage you to reach out to our HR team for further support and guidance on your specific situation.

If you have any queries relating to holiday pay please do not hesitate to get in contact with one of our People team contacts.