How is holiday pay calculated for workers without fixed hours or pay?

In April 2020, changes are coming into force that impact on the way in which statutory holiday pay should be calculated for workers without fixed hours or pay.

The general principle is that statutory holiday pay should be calculated in accordance with pay that is “normally received”. Employers should therefore take into account payments other than basic pay when calculating statutory holiday pay. This might include, for example, commission, guaranteed and non-guaranteed overtime, and voluntary overtime if it is worked on a sufficiently regular or recurring basis.

Currently, where an employee has variable pay or hours, their holiday is generally calculated using an average of their pay over the previous 12 weeks. From 6 April, the reference period used in holiday pay calculations will increase to 52 weeks. This aims to ensure that workers who do not have a regular working pattern throughout the year are not disadvantaged by having to take their holiday at a quiet time of the year when their holiday pay might be lower.

The Government has now updated its guidance on calculating statutory holiday pay for workers without fixed hours in anticipation of those changes. It reminds employers of the general principles that “holiday pay is based on the principle that a worker should not suffer financially for taking holiday” and that “pay received by a worker while they are on holiday should reflect what they would have earned if they had been at work”.

The guidance sets out a number of general principles and practical examples, including:

If a worker has not been in employment for long enough to build up 52-weeks’ worth of pay data, the employer should use however many complete weeks of data they have.
The reference period must include weeks for which the worker was actually paid, and must not include weeks where they were not paid as they did not work.
Employers should only count back as far as is needed to achieve 52-weeks’ worth of pay data if this is less than 104 weeks.
The reference period should start from the last whole week that was worked ending on or before the first day of leave, which will typically start on a Sunday and end on a Saturday.
It is best practice for holiday pay to be paid in the pay reference period in which the leave is taken, unless it is not possible – for example because overtime is approved by the employer at the end of the month, after payroll cut off.

The guidance also deals with calculating holiday pay for workers on zero-hours contracts and those on short contracts or temporary workers; and how to deal with different periods of leave during the reference period, such as parental leave.

Comment

The guidance focuses on the 5.6 weeks’ paid holiday that an employee is entitled to every year. This 5.6-week entitlement is made up of 4 weeks leave derived from EU law (the Working Time Directive) and 1.6 weeks additional leave that was introduced in the UK under the Working Time Regulations.

However, as the guidance points out, the caselaw that sets out the principle that holiday pay must be based on “normal remuneration” only relates to the statutory minimum of 4 weeks that is derived from the Working Time Directive. The principle therefore does not apply to the additional 1.6 weeks additional leave entitlement. Entitlement to holiday pay in relation to that 1.6 weeks and any further, contractual, entitlement to holiday will depend on the terms of the contract of employment. There may be practical reasons, however, for employers choosing to apply the same principles to all holiday entitlement, particularly in light of the administrative process involved in calculating the correct rate of holiday pay.

The guidance has not been updated to take account of a recent Court of Appeal decision in relation to holiday pay calculations for term-time workers. That decision will be relevant for employers currently calculating holiday pay for part-year workers with no normal working hours on the basis of 12.07% of hours worked. Employers should therefore consider seeking further advice before relying on this guidance on this particular issue.

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