For most employees, a holiday is a well-earned break. For payroll professionals, holiday pay is a calculation nightmare. Behind every “Out of Office” reply sits a spreadsheet, an HR system, and a payroll engine churning through complex legislation, case law, and contract types.
Having the right data to hand is crucial, yet it is often one of the biggest challenges if information is siloed, systems are not integrated, and data quality is poor.
What should be simple (paying someone fairly when they take time off) becomes one of the most complex responsibilities in UK employment. And with upcoming changes in the law, it’s about to get even more nuanced.
The principle is simple. The reality is not.
Under the Working Time Regulations 1998, workers are entitled to 5.6 weeks of paid holiday per year. For full-time workers, that’s typically 28 days. But the simplicity ends there.
For zero-hours workers, part-year employees, or anyone with variable pay, whether through variable hours or pay elements such as commission. Calculating the right amount of holiday pay means understanding not just statutory entitlements but also evolving case law, practical payroll intricacies and sight of accurate information..
When data becomes the bottleneck
Accurate holiday pay depends on having a clear, accessible picture of a worker’s actual earnings over time. That means more than just hourly rates or payslips; it means granular records of shifts worked, overtime hours, commission payments, and unpaid weeks.
For many employers, the biggest obstacle to compliance isn’t intent, it’s information.
- Is your system tracking pay elements that legally count toward “normal remuneration”?
- Can you easily exclude unpaid weeks from reference periods?
- Are overtime and bonuses captured as structured data or buried in payslip notes or spreadsheets?
Without robust record keeping and access to clean, complete data, even the most well-meaning payroll team is flying blind.
The 52-week reference period
Since April 2020, employers must use a 52-week reference period (excluding unpaid weeks) to determine a worker’s average weekly pay. This helps smooth out earnings fluctuations, but creates a logistical burden, especially when dealing with casual or irregular work patterns.
Take Ava, a café worker on a zero-hours contract:
- In the summer, she works 40+ hours/week.
- In the winter, it drops to 10–15.
- She earns varying amounts of overtime, plus occasional bonuses.
When she takes a week off in November, the payroll team must look back over the previous 52 paid weeks, average her earnings, and calculate accordingly. Without integrated records of her actual hours and earnings, that’s not a holiday pay calculation – it’s forensic accounting.
What counts as ‘normal remuneration’?
The courts have consistently ruled that holiday pay should reflect what a worker normally earns, not just their basic wage. That introduces the need for deeper payroll insight and understanding, not just raw data.
Key case law includes:
- Lock v British Gas Trading Ltd (2016): Regular commission must be included.
- Bear Scotland v Fulton (2014): Regular non-guaranteed overtime is part of holiday pay.
- Flowers v East of England Ambulance Service (2019): Even voluntary overtime, if regular, must be counted.
- Agnew v Chief Constable of the Police Service of Northern Ireland (2023): Gaps of over three months don’t break a chain of underpayments – meaning years of poor data management could come back to haunt you.
How having accurate data makes a difference
Take Sophie, a full-time employee earning:
- £2,000/month base salary
- £600/month in commission (average over the past 12 months)
She takes a week’s annual leave.
Incorrect holiday pay (base only):
- £2,000 × 12 ÷ 52 = £461.54
Correct holiday pay (base + commission):
- (£2,600 × 12) ÷ 52 = £600
- Underpayment of £138.46 for just one week.
Now, imagine your system didn’t flag that she consistently earns £600 in commission. Would your payroll team know to include it? Would they have to manually trawl 12 months of data to find it? Multiply this across your workforce, and the business risk becomes clear.
Bigger changes on the horizon
The upcoming Employment Rights Bill, which will come into force later this year, will add a new layer of legal clarity and operational pressure.
1. Rolled-up holiday pay legalised for irregular hours
Employers will be allowed to pay an additional percentage (e.g. 12.07%) on top of wages to cover holiday pay for irregular-hours and part-year workers—but only if it’s applied transparently and clearly communicated. Poor record-keeping could make this simple-sounding reform a new compliance risk.
2. Overtime and commission must be included
The bill aligns the law with existing case law: regular overtime and commission must be included in holiday pay calculations. There’s no more ambiguity, but also no shortcuts.
3. Mandatory record-keeping
Employers must now retain holiday pay records for up to six years, including earnings breakdowns, reference periods, and justification for calculations.
That’s not just a paperwork requirement. It calls for better payroll systems, smarter data access, and a single source of truth across the organisation.
4. Zero-hours contracts must reflect reality
Employers will be required to offer workers contracts that reflect actual patterns of work if those patterns become consistent over time, making historic workforce data essential for decision-making and compliance.
Getting holiday pay right starts with data
Holiday pay isn’t just a payroll issue. It’s a data challenge, a legal risk, and a trust signal to your employees.
When done right, it proves that your organisation is structured, compliant, and committed to fairness. When done wrong, it opens the door to claims, audits, and reputational damage.
At Ascend, we believe that accuracy is integrity in action, and nowhere is that more visible than how you handle holiday pay. Getting it right means investing in the systems, data, and processes that support payroll and people.
