Changes to holiday pay calculations

Calculation of holiday pay for variable workers

(Amendments to regulation 16 of the Working Time Regulations 1998)

What is the law now?

As it stands, all employees are entitled to paid annual leave and they must be paid the same amount when on holiday as they would receive when they’re at work – regardless of their working pattern.

Holiday pay can be calculated based on the days or hours worked per week, annual hours, compressed hours or shifts.

If an employee’s working hours don’t vary (i.e. they work 9am – 5:30pm, 5 days per week), their holiday pay should be calculated using their usual pay rate.

For example, Jack works from 9am to 5:30pm every day, Monday to Friday. If he takes seven days of annual leave in January, he will be paid the same amount as if he has worked a typical week.

However (and this is where it gets a little complicated), if an employee doesn’t have fixed or regular hours or their pay isn’t always the same, their holiday pay is calculated based on the average number of hours worked, at their average pay in the previous 12 weeks. 12 weeks being the current holiday reference period under the current iteration of the Working Time Regulations.

For example, Jill has worked an average of 23 hours per week over the last 12 weeks and has been paid an average of £10.50 per hour for her work. As such, she would be entitled to £241.50 per week as holiday pay (£10.50 per hour x 23 hours).

What will change on 6th April 2020?

The amendments being made to the Working Time Regulations 1998 that come into force in April will make changes to the holiday reference period which is currently 12 weeks.

The holiday reference period used to calculate holiday pay for variable workers is being increased to 52 weeks (for employees that have been in your employment for more than 52 weeks).

Thus, to calculate the holiday pay for an employee on variable hours or pay, you will need to work out the average hours worked and average pay from the previous 52 weeks.

If you have employees on variable hours or pay that have been in your employment for less than 52 weeks, the holiday reference period will be the number of weeks for which they have been employed. Again, you would need to calculate the average number of hours worked and that average pay for the period of time they have been employed.

As with current employment law, any weeks an employee hasn’t worked or received pay for should be excluded from your calculations.

What does it mean for your business?

These changes to the methods in which holiday pay is calculated should greatly benefit employees on variable hours. The change in reference period should help even out any peaks and troughs in pay for employees, particularly those in seasonal roles.

What it does mean for your business, however, is that you must ensure that your records of the hours worked and pay received by these employees are correct as any incorrect records will directly impact an employee’s pay. Online clocking in systems or timesheets can be helpful to track the exact hours worked by each employee, where details of hours worked and any variable pay entitlement can be logged. This information is then securely stored online and is easily accessible whenever employees make annual leave requests.