All change for holiday pay?

A recent webinar of payroll professionals featured a poll in which more than 30% of respondents said they either knew of a client or were themselves still calculating holiday pay using the 12.07% method, which is no longer allowed. Are you aware of these changes?

They were brought in following a 2019 Supreme Court judgment in the case of Harpur Trust v Brazel, in which it was examined “whether a worker’s right to paid annual leave is accumulated according to the working pattern of the worker and/or is pro-rated”.

Music teacher Ms Brazel was engaged by the Harpur Trust on a zero-hours, term-time contract, not working full-time or for the whole year and receiving holiday pay for three periods within the school year. In 2011, Harpur Trust altered the manner in which it calculated the amount of this holiday pay, resulting in a less favourable outcome for Ms Brazel – hence her bringing the legal proceedings starting in 2015.

The result was a new way of calculating holiday pay – complex is one way of describing it! Requiring 52 working weeks of history (so ignoring any weeks where an employee did not work) to calculate averages has resulted in an extensively increased calculation for these workers.

Although unlikely to be a scenario but an extreme example of how the new calculation method is flawed, someone who is employed for the whole year but only works 10 hours a week at £100 per hour for 12 weeks during the year (therefore £1,000 per week) used to accrue 14.484 hours’ holiday entitlement using the 12.07% method, giving them £1,448.40 holiday pay. Under the current system, they would be entitled to 5.6 weeks’ holiday. With their average pay being £1,000 per week, that entitles them to £5,600 holiday pay.

It is therefore not a huge surprise that the new system may be about to change. On 12 January, the Department for Business, Energy & Industrial Strategy (BEIS) opened a consultation on the calculation of holiday entitlement received by part-year and irregular hours workers.

In the consultation, BEIS proposes to introduce a holiday entitlement reference period for such workers, ensuring that their pay and entitlement is directly proportionate to the time they spend working – and that the extreme example given earlier does not happen.

As this is just at the consultation stage, it does not yet affect the current requirements. You need to ensure that 5.6 weeks’ annual leave and pay is received by all part-year and irregular hours workers.

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