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Recent changes to calculating holiday pay

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Every now and then the employment law gods pass down some new case law to keep us on our toes. In recent weeks, a change to managing holiday pay means it is worth considering how this may impact you and your business in practice – especially if you employ individuals who work irregular, or variable hours.

Introduction

Holiday calculations are something business owners can stumble over at the best of times, especially when working patterns stray from the usual 9-5 we are all familiar with. Causing this current complication is the Supreme Court’s recent review of Harpur Trust v Brazel. In this case they found the method of calculating holiday pay using a 12.07% method to be incorrect.

For many years, this has been a standard way for businesses to calculate the holiday pay owed to those who work irregular hours – even advocated as an appropriate method by ACAS, the employee support service for raising employment tribunal claims. However, this most recent ruling means it is not considered the correct method moving forward, as it can result in employees receiving a lower amount of pay than they are entitled to.

What is the 12.07% method of calculating holiday pay?

Previously this was the standard way of calculating holidays owed to employees on zero hour contracts. It sounds complicated but is based on an employee getting 5.6 weeks of holiday within a 52 week year, this equates to 12.07% of the year where the employee is on annual leave. When multiplied by the hours worked in the holiday year, accrued annual leave can be calculated and then paid at the standard hourly rate.

Why is it incorrect now?

Using the 12.07% rule can mean that some individuals will receive less holiday pay than they are owed according to the working time regulations, which demands 5.6 weeks of annual leave each year. Therefore, the 12.07% may penalise those who don’t work for periods within the holiday year. For example, term-time workers and those on zero hour contracts will likely see the biggest impact of this change.

What does this mean for calculating holiday pay?

To counter this inconsistency, the Supreme Court have ruled the best way to calculate annual leave is to assume 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, employers will need to use the data they do have available.

Although this change may result in scenarios where such employees receive enhanced holiday entitlements compared to their full-time counterparts, it was made clear by the Supreme Court this would be acceptable as long as it is not the part-time workers being placed at a detriment. This seems to tie n with current government attitudes towards the gig-economy, where businesses are being encouraged to offer more stable hours and move away from offering employment on a zero hour basis.

Moving forward it is important use of the 12.07% method ends, and you adopt a ‘52 week’ approach, as outlined above. In theory, this should give consistency to how holiday entitlements are calculated across the board as all employees will be entitled to a minimum of 5.6 weeks of annual leave, with a week’s annual leave equating to an average week of pay. Practically, the Supreme Court have failed to provide guidance on how a single day ought to be best calculated under these new rules and the best answer for now is to use an average number of days worked each week during the ‘52 week’ data period.

Further support

If holiday entitlements and pay are causing you a headache, with or without the change outlined, don’t hesitate to get in touch and we will be able to support you in managing this safely for your business.

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