Calculating holiday pay for workers without fixed hours or pay

Holiday pay has been a big problem for a long time following a number of decisions made by the  European Court of Justice.

Post Brexit, the government has now confirmed some key changes to the law on holiday pay. From 1 January 2023 the UK has implemented the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2024 which amend both the Working Time Regulations and TUPE.   

If your holiday year starts in April 2024 then the new rules will apply from then.  If, however, your annual leave year starts in January, these rules will apply from 1 January 2025.

As a recap, workers have the entitlement of 5.6 weeks of paid holiday per leave year, which they start accruing from day one and pro rata for the first year. The leave is made up of 4 weeks of “Euro” leave and an additional 1.6 weeks of domestic leave. 

Holiday pay for casual workers

One area which has been fraught with litigation is the holiday pay entitlement for casual workers or those who work irregular hours. Some organisations used to pay holiday pay to causal workers by including an additional percentage in their payslip (“rolled up” holiday pay). This was determined to be unlawful roughly 18 years ago.

As an alternative, employers generally used a rule of thumb calculation to pay casual workers their accrued holiday pay. This rule of thumb worked by applying a percentage figure of 12.07% to the average amount of hours worked during the relevant pay period. This percentage was used because the standard working year is 46.4 weeks (52 weeks less the statutory 5.6 weeks holiday entitlement) and 5.6 weeks is 12.07% of 46.4 weeks.

However, this calculation presented problems for workers such as term-time only workers as their holiday pay was only based 12.07% of the hours they worked in any given year. This was challenged by a worker in the case of The Harpur Trust v Brazel which had a significant impact for organisations who used term-time workers as well as those who engaged casual workers.

In this case, Ms Brazel argued that she should have received her entitlement to 5.6 weeks’ paid leave based on her average pay whilst she was at work, rather than by using the 12.07% method.

The Supreme Court agreed and ruled that this method was unlawful, and she was entitled to be paid for 5.6 weeks of holiday entitlement based on an average of the pay she received whilst working over the previous annual leave year (and ignoring any periods where she didn’t work). This case was controversial because it meant that for Ms Brazel and workers like her, they would receive more holiday pay than many part time workers.

The new regulations have been Introduced in part to rectify the changes in the law brought about by this case. They have also made changes to the law on rolled up holiday pay and clarified, to some extent, what elements of pay should be included in holiday pay.

The regulations define “irregular hours worker” as someone whose paid hours of work in any pay period is “wholly or mostly variable.” This would cover a zero hours worker, whose hours of work may vary day by day or week by week (whichever is the pay period).

The regulations also define a “part year worker” as someone who is only required to work part of any leave year and there are periods within that leave year where the contract continues but they are not required to work and for which they are not paid. This could cover someone working in education who is only required to work term time only.

For the first year of engagement, workers are paid holiday pro rata’d to the time they have actually worked, ie. they receive 1/1^2th of their statutory annual leave entitlement per month (there is no change to this established position). After the first year of the engagement, the new regulations will apply and holiday entitlement for IHWs and PYWs will be calculated as 12.07% of the actual hours worked during the preceding 52 weeks. This overturns the Brazel decision.  

So, if an organisation’s leave year starts from April,  this year, there are 2 options for employers when dealing with annual leave for these types of workers:

1. Pay holidays if and when holidays are taken (this may be appropriate for open ended contracts for casual workers). Workers will be paid an average weekly pay for each week of holiday. A week’s paid holiday will be based on the average number of hours worked in the preceding 52 week period (or less if they have not worked for full year), or
2. Pay rolled up holiday pay each pay period which is based on the 12.07% calculation as set out above. This may be more appropriate for shorter term assignments.

In addition to the changes above, the government has also taken the opportunity to confirm a number of case law decisions regarding carry over of leave and payments to be included in holiday pay. 

Carry over of annual leave

From 1 January 2024 the Regulations confirm that workers can carry over leave if they were unable to take it in full or in part during the leave year. 

A worker can carry over the full 5.6 weeks if they were unable to take the leave because of a period of statutory leave (maternity or other family related).  If they were unable to take leave due to sickness, the carry over will be limited to 4 weeks’ Euro leave which must be used within the following 18 months.  However, the employer must give the worker a reasonable opportunity to take their Euro leave, and remind them of the “use it or lose it” warning.   Otherwise employers could be liable for unused annual leave entitlement on termination.

Payments included in holiday pay

Payments “intrinsically linked” to the performance of the workers’ duties such as commission payments and overtime payments as well as payments for professional or personal status relating to length of service, seniority or professional qualifications will need to be factored into holiday payments.   However, this will only apply to the 4 weeks of Euro leave which is likely to be administratively difficult to deal with in practice.

Action points

This is likely to be viewed favourably by employers who use causal workers as it does now mean that holiday pay is linked to the amount of hours worked in a pay period. Employers should consider what type of workers they engage and then decide which method of holiday pay is appropriate. This will be specific to the type of workers engaged by a particular organisation.  

Many employers will have changed policies and procedures and possibly contracts following the case law decisions and will now have to amend them in light of these further changes. 

Employers are well advised to keep a record of all calculations when calculating holiday pay for casual workers to ensure that organisations can demonstrate legal compliance with the new rules.

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