Don’t overlook new holiday pay rules if your annual leave period starts in January
In January 2024, changes to the calculation of holiday pay came out of the Working Time Regulation, and case law particularly affected employees working irregular hours with leave years running from 1 April 2024 to 31 March 2025.
But what about irregular hours and part-year employees who have leave from 1 January 2025, running on a calendar year?
Employers whose annual leave starts in April should already be compliant, but those operating on a calendar year must prepare for changes to the calculations for these employees from the beginning of January 2025.
The new rules are designed to simplify holiday entitlement and pay, although this is open to debate!
What classifies an irregular or part-time employee?
Before we delve too deeply into the changes, we first need to define what is an employee on irregular hours and a part-year employee.
Irregular Hours Employee
An irregular hours employee is someone whose number of hours worked is directed by the terms of their contract to be variable. This includes employees on zero-hour contracts.
Part-Year Employee
A part-year employee is someone who, under the terms of their contract, is required to work only part of the year with periods in the year of at least a week when they are not required to work and are not paid. This includes employees who are contracted to work term-time only.
These employees’ contracts are in place all year round, including when they are not working. However, periods of sick and statutory leave are ignored for the purpose of defining a part year employee.
But … the Government has issued guidance for part-year employees who are paid an annualised salary over 12 months.
Such employees are NOT considered part-year workers for the purposes of the regulations.
Why this change? The guidance states that as they would not have been working for periods, they would not have received pay. It is only because their pay has been annualised. This appears to be a direct result of the Harpers Trust v Brazel case.
The new Holiday Pay Calculation
For employees with a holiday entitlement of the statutory 5.6 weeks, holiday pay is calculated at 12.07% of pay. So, if the employee is entitled to more than this statutory amount, the calculation is as follows;
- For an employee on 6 weeks holiday entitlement
- 6/46 (being 52 weeks less 6 weeks holiday) = 0.1304
- Holiday pay is therefore calculated at 13.04%
The basis calculation is made for any holiday entitlement over the statutory entitlement.
We then need to consider employees on sick or statutory leave, such as maternity leave, etc. There are three steps here, as there remains an accrual of holidays during these periods.
Step 1
Calculate the average number of hours per week worked during the previous 52 weeks ending on the day before the sick or statutory leave commenced. For employees who have not worked for 52 weeks, then take the hours worked in the full period of employment.
Step 2
Calculate 12.07% of the number of hours in step 1. This figure will be the number of hours of leave that has been accrued during the sick or statutory leave period
Step 3
To calculate the number of hours of annual leave accrued during the absence or pay period, multiply the figure in step 2 by the number of weeks in a pay period that the employee was on sick or statutory leave.
I think an example is perhaps required!
Remember, we are looking for the number of accrued hours in an absence period.
Example:
Megan is a part-time worker entitled to a statutory holiday entitlement of 5.6 weeks. She has worked 28 weeks over a 52-week period with a total number of 950 hours worked. She was then on maternity leave for 38 weeks.
Step 1
Deduct the statutory entitlement from 52 weeks,
52 – 5.6 = 46.4.
950 hours/46.4 = 20.47 hours worked per week on average
Step 2
The number of holiday hours accrued each week is the average hours worked multiplied by 12.07%
20.47 x 12.07% = 2.47 hours
Step 3
Calculate the number of hours accrued by the number of hours accrued at step 2
28 x 2.47 = 69.16.
As we round down to the nearest hour, in this case, the employee has accrued 69 hours of holiday pay during the maternity period.
Rolled Up Holiday Pay
The new guidance gives part-year and irregularly paid employees entitlement to rolled-up holiday pay. Rolled-up holiday pay is when holiday pay is included in an employee’s regular pay rather than paying separately when the employee takes their holiday.
Rolled-up holiday pay is paid at the rate of 12.07% for employees entitled to the statutory minimum holidays of 5.6 weeks.
If the entitlement is greater, the percentage will increase as in the example above, an employee entitled to 6 weeks holiday, the percentage is 13.04%
Rolled-up holiday is calculated on a pay period basis. An example,
- John has worked 36 hours in a week. At £13.50 per hour this equals £486
- The rolled-up holiday pay is £486 x 12.07% = £58.66
An employee with rolled-up holiday pay is still entitled to receive rolled-up pay when on sick or statutory leave for each pay period during the absence. The holiday pay is based on the average rolled-up pay the employee has received in the previous 52 weeks or for the duration of employment if this is less than 52 weeks.
The Bigger Picture
There is much to ponder here. However, employees must be fully consulted and aware of the changes to calculating their holiday pay.
These changes aim to make holiday pay fairer and clearer for everyone. While adjustments may feel daunting, you can stay compliant by updating your contracts, liaising with your payroll team, and keeping employees informed.
