Holiday Entitlement and Holiday Pay – Key points for Employers

Holiday entitlement and pay is a notoriously difficult area for HR practitioners. Typical challenges include calculating holiday entitlement for casual or zero hours workers, accounting for bank holidays for part-time staff and trying to keep up with the constantly evolving case law regarding what aspects of employee remuneration are deemed “normal pay” and therefore must be included in holiday pay. We summarise the main questions and answers below. However, legal advice should always be taken on a specific scenario. The below should only be treated as guidance.

How much holiday is an employee/worker entitled to?

Workers have a statutory entitlement to 5.6 week’s paid leave each year (28 days for someone working 5 days a week). Contractual entitlement is often more generous.

How do you work out holiday entitlement for part-timers?

Where there are comparable full-time workers, part-time workers are entitled to a pro-rata entitlement.

What about bank holidays for part-time staff?

It is incorrect to assume that bank holidays which do not fall on a day that is normally worked can be excluded from the holiday entitlement calculation for part-time staff. Part-timers are protected from less favourable treatment due to part-time status and therefore must be allocated the pro-rata equivalent of the total full-time holiday entitlement including bank holidays and allowed to take it on their normal working days. If their normal working days include bank holidays, holiday would be deducted on the applicable bank holiday in the same way as for a full-time worker.

How do you work out holiday entitlement for casual or zero hours staff?

The formula often used to work out the equivalent statutory minimum holiday entitlement for casual or zero hours staff is to apply 12.07% to the total hours worked. This is because 5.6 is 12.07% of 46.4 (where 5.6 is the number of weeks’ annual leave entitlement and 52 - 5.6 = 46.4 which is the number of working weeks in the year). If the contractual holiday entitlement is more generous that statutory entitlement this percentage would need to be recalculated.  

This formula can be applied on a rolling basis for example at the end of each pay reference period to work out the amount of holiday which has accrued, or it can be applied at the end of each assignment where the contract clearly specifies that the contractual relationship ends between each assignment. Having said that, making a payment in lieu of holiday is unlawful under the Working Time Regulations except on termination as it is seen as a disincentive for workers to take holiday. Therefore employers take a risk if they make a payment on account of holiday at the end of each reference period rather than making a payment to a worker specifically at the time they  take holiday unless the payment in lieu is on termination of the contract.

Using the accrual method explained above can also cause other problems as illustrated in the case of Harpur Trust v Brazel 2019. This case highlighted the difficulties of the accrual approach where the worker is a “part-year worker”, in other words, where there are weeks in the year where the worker is under contract (and therefore accruing leave under the Working Time Regulations 1998) but is not working or on paid annual leave.  The practical application of this case is complicated and therefore if you have an employee working on a part year basis, you should seek legal advice on how to deal with holidays for such workers.

How do you calculate holiday pay for full time, part-time staff, and variable hours staff?

Subject to what we say below about what is normal pay, calculating holiday pay for full-time or part time employees whose hours and pay are consistent should be straightforward. They are basically entitled to a week’s or day’s pay for each week or day off.  Holiday pay for workers who do not have regular hours or regular pay should be calculated based on their average pay over a 52-reference period or the duration of their employment if shorter. Please note weeks in which no wages were earnt are excluded and an employer is required to add earlier weeks into the calculation (going back up to a maximum of 104 weeks).

What is normal pay for the purposes of holiday pay?

Case law has established that holiday pay (or at least the 4 weeks holiday derived from the EU Working Time Directive) should be calculated based on normal pay including regularly received overtime, commission and certain standby, on-call or taxable travel allowance payments. This includes all overtime whether or not the employee is required to do it by the contract. There is no clear guidance setting out how regularly overtime or the other payments must be received for them to be included in the calculation.

Uncertainty remains over how employers should treat other variable elements of pay such as bonuses.

There is also no guidance within the caselaw as to how include regular overtime, commission or other sums within the holiday pay calculation. These factors can make calculating holiday pay in some cases a very difficult and uncertain exercise.

If you need any further help, guidance, or template letters in connection with communications about holiday pay, please contact Heather Love.