From 6 April 2020, the way you calculate holiday pay may change.
As part of the Good Work Plan and the government’s response to the Taylor Review of Modern Working Practices, a number of changes to employment legislation will take effect from April 2020. Below is a summary of the key changes relating to holiday pay which employers need to prepare for.
The Department of Business, Energy and Industrial Strategy (BEIS) guidance on calculating holiday entitlement has recently been updated: holiday entitlement should now be calculated by reference to the number of weeks the individual is engaged rather than as a percentage of the hours worked.
This can have a big impact on calculations to determine the amount of leave due and the amount that should be paid.
All workers are entitled to 5.6 weeks’ paid holiday, regardless of their length of service and in the first year, leave accrues at 1/12th of that entitlement each month.
If the contract continues during periods of non-work, holiday also continues to accrue.
For workers with irregular hours, it is not possible to calculate in advance the annual holiday entitlement in days or hours, nor determine what constitutes a week’s leave.
Therefore, many employers base holiday entitlement for staff with irregular hours on 12.07% of the hours worked however, this is not prescribed by the working time tegulations 1998, and following a recent court of appeal case, is no longer included in the BEIS guidance.
Whilst the 12.07% formula is fairly accurate for those with regular working patterns, it may deprive workers of their full holiday entitlement if they are regularly engaged (for example, under a zero hours or umbrella contract) but also have periods when they are not working.
This is because the formula is linked to the hours worked, and so workers do not accrue leave when they are not working.
Calculating holiday pay
Moving to a 52-week reference period
From 6 April 2020, the reference period for calculating holiday pay for workers with no regular working hours will be extended to 52 weeks (or, if less, the number of complete weeks the worker has been employed). This is designed to even out the seasonal variation in pay for many casual workers.
Rolled up holiday pay
Rolled up holiday should not be processed as this discourages workers from taking their holiday Given increasing scrutiny on holiday pay, workers may challenge the method of calculating rolled up holiday pay so this should be avoided.
For workers who work every week of the contract, although no longer approved by BEIS, some employers may choose to continue to apply the 12.07% formula to establish the amount of leave due, as it should ensure that workers receive their full holiday entitlement.
Once the entitlement to leave (in hours) has been calculated applying the 12.07% approach, holiday pay should be calculated by averaging pay over the previous 52 weeks during which they were paid (from 6 April 2020), or, if less, the number of whole weeks available. A reconciliation is recommended at the end of the contract (or year) to ensure that workers have received their full holiday entitlement and been appropriately paid.
For workers whose hours fluctuate, the 12.07% formula will be a much riskier strategy. Instead, employers should determine what constitutes a ‘week’ by averaging the days/hours worked over a reference period (e.g., 12 weeks). Leave should be paid by reference to an average week’s pay for each week of leave.
This can be administratively challenging and careful systems planning is needed to ensure the calculations are correct.
The BEIS guidance acknowledges that for those working short or temporary contracts, accrued holiday may not be taken before the end of employment, and this can be paid in lieu on termination of employment. The holiday pay should be calculated using an average of pay in the weeks in which the worker was paid.
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