Holiday Pay, but not as we know it

Holiday
The law on holiday pay changed as of 6 April 2020. Employers must follow the new law.

Back in 1998, the Working Time Regulations (WTR) brought the entitlement for 5.6 weeks holiday into law. Although simple and clear for full-time employees, nothing was articulated for other working patterns. Given this ambiguity, many quickly came to use the well-known “12.07% rule”. This was derived by assuming that a full-time worker would work 46.4 weeks and take 5.6 weeks holiday and by simple maths 5.6 ÷ 46.4 = 12.07%. This was often used as the basis for workers who needed to receive holiday pay such as hourly workers, part-time workers, and zero-hour workers. 

However, it is important to note that 12.07% was never the law. The law as per WTR only stated 5.6 weeks and therefore 12.07% was merely a practical and convenient interpretation of the law. Because of this, it was challenged in several tribunal and legal cases. The most notable case was Harpur Trust vs. Brazel, a music teacher who only worked certain hours during term time. The Employment Appeal Tribunal (EAT’s) decision first ruled that 12.07% could not be used. This was then referred to the Court of Appeal in 2019. The Court of Appeal confirmed EAT’s ruling that holiday pay cannot be based on 12.07% and must be based on the WTR wording. In effect, EAT and the Court of Appeal confirmed that 12.07% was no longer a legal interpretation of the WTR.

The government department responsible for holiday pay, BEIS (Business, Energy and Industrial Strategy), brought this change into effect in April 2020 along with the new 52-week holiday pay reference period. The law on holiday pay changed as of 6 April 2020 and employers must follow the new law:

  • The principle is that that pay received by a worker while they are on holiday should reflect what they would have earned if they had been at work. Put another way: one weeks holiday equals one week pay, as averaged over 52 weeks.
  • Every worker is entitled to 5.6 weeks holiday per year. 

For workers with fixed hours e.g. full-time or part-time x hours per week, one weeks holiday equal’s one week’s working pay. Even if a worker only works one day per week, they are still entitled to 5.6 weeks, but each week will only be paid at the pay rate of 1-day.

Where working hours vary, they have produced [not for the faint hearted] a 30-page guide which details how one week’s pay must be calculated. For those who need a quick summary: find the average of 52 weeks, don’t go back further than 104 weeks, include only paid weeks and use fewer if you can’t find 52.

ACAS have now removed all prior endorsement around the 12.07% rule and have re-written their guidance to fully reflect the law. The Government calculator no longer includes any calculation that uses 12.07%

Some have doubted this clarification of the law because it can give bizarre results. For example, a worker who doesn’t work every week receives the same 5.6 weeks holiday as someone who works every week;  Working for one week and earning £1,000 would mean £5,600 holiday pay even if no work is done for the next 51 weeks. All these arguments, and many more, were put by the defence and all were rejected by the Court of Appeal – they simply stated that there was nothing in the WTR that says part-year workers should be treated less favourably than full-time workers.

The law on holiday pay can now be very simply summarised:

  1. You cannot use the 12.07% rule as the basis for holiday pay
  2. Every worker must receive 5.6 weeks holiday, regardless of their working pattern
  3. One week holiday pay is the average over 52-weeks, excluding unpaid weeks 
  4. Rolled-up holiday can no longer be used and if a contract includes this, it must be renegotiated. A worker must take their holiday and not be at work.

Workers have a 2-year limit for historic holiday pay claims, but multiple claims may be made if the practice continues.

In practical terms though, this is far from simple. Payroll, HR and finance departments now have the responsibility to put systems and processes in place that implement the law. Anyone using 12.07% as a convenient shortcut will need to stop as it is no longer lawful. 

At paiyroll®, we have extensive experience in implementing fully automated holiday pay systems that comply with the WTR and the new law. Feel free to get in touch.

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