Holiday pay:
Irregular-hour workers

Never calculate holiday pay ever again.

When it comes to holiday pay there is a lot of knowledge and effort involved in understanding the legislation, staying on top of ongoing changes, and calculating it.

Getting holiday pay right is critical as employers may be penalised for inaccuracies. Here we will talk about everything you need to know to help you get through the complexities of holiday pay, and how payroll automation could solve all your holiday pay needs.

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Holiday pay webinar & more…

We untangle the 2024 holiday pay legislation, what’s changed, and solutions for calculating holiday pay. Click below to access the recording.

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Why accurate holiday pay is important?

By law, employees have certain rights when it comes to holiday pay. Making mistakes in holiday pay calculations can result in hefty business fines, so getting holiday pay right is essential.

However keeping up with complex and time-consuming changes that affect employees, managers, and holiday administrators is not easy.

That’s where using payroll software that automates holiday pay calculations can make a difference – holiday pay is completely automated!

types of workers

First, let’s clarify what are the different types of workers. We can do this by looking at the pattern of their earnings.

Salaried worker

Receives fixed salary for a set number of hours, every pay period. Their salaries might increase with a pay rise.

Variable pay worker

Receives a base salary, with regular additional payments in the form of commission or overtime.

Zero-hour worker

Receives pay based on hours worked in each pay period, but as there is no fixed work schedule, pay is inconsistent.

Hereafter we’ll focus on the irregular-hour worker, as this is the only worker type affected by the 2024 holiday pay law.

THE GUIDING PRINCIPLE

“Pay received by a worker while they are on holiday should reflect what they would have earned if they had been at work and working.”

Secondly, we need to understand the premise of holiday pay. When an irregular-hour worker goes on holiday, they are not working and therefore are not being paid.

With the 2024 legislation, “pay received by a worker while on holiday should reflect what they would have earned if they had been at work working”. We coined this guiding principle that should help you stay on course. So if there’s one thing you should remember from this page, it’s this!

Reflecting back on this principle whenever you are unsure about holiday pay should be your guide to getting holiday pay right.

2024 Holiday Pay Legislation for Irregular Hour Workers

On 1 January, 2024 the government announced the biggest shake-up in holiday pay since 2020. Employers can now choose between 2 new holiday pay methods.

Method 1:
12.07% rolled-up holiday pay

For most payroll professionals, holiday pay is calculated manually, using an Excel spreadsheet, a calculator, or a combination of the two.

This can take hours or even days, and is prone to human error.

Method 2:
Accrual of hours at 12.07%

With paiyroll^®, holiday pay is completely automated:

Done in minutes

For every employee

Any time, anywhere

A few things to note

These changes only apply to irregular-hour workers (zero-hours contractors) workers and part-year workers (e.g. term-time).
All other workers are unaffected and will follow the 52-week average reference period (i.e. salaried workers and variable-hour workers).
The changes will not take effect until an employer’s holiday leave year starts after April 2024.

Method 1: Rolled-Up Holiday Pay (RHP)

With this method, holiday pay is calculated at 12.07% of the total pay for that period, and included in the payslip.

The government expects employers to mark RHP pay separately on each payslip. Although this is the simplest approach, many businesses avoid this for several reasons, particularly because it is not a cost-effective solution and deters employees from taking time off. Nevertheless, you can choose to use this option if it suits your needs.

Since they’re already getting holiday pay in their regular paychecks, they might feel less inclined to take actual time off, as they will not get paid anything while on holiday. But employers still need to make sure they’re taking their 5.6 weeks of annual leave, and will need to track this separately.

Rolled up holiday pay is based on total earnings and can’t account for different pay rates. So if someone does more overtime than usual, you’re stuck paying that extra 12.07% on the whole amount, including overtime.

Method 2: Accrued Holiday Pay

With this method, work out holiday entitlement first – 12.07% of hours worked in each pay period. These holiday hours are accrued (i.e. ‘banked’) and then used to calculate holiday pay based on a rolling 52-week average pay.

Holiday pay is then only paid out when a worker takes a holiday. This is a preferred method of calculating holiday pay as it encourages employees to take holidays and is a cost-effective solution. However, it requires careful tracking of holiday entitlement and holiday time off, complex calculations, and a robust, responsive system to manage holiday requests.

A few things to note:

If the worker has been employed for less than 52 weeks, use as many complete weeks of data for your calculations.
Backdated holiday pay can go as far back as 104 weeks (2 years).

6 – accrue entitled holiday hours (not pay).
9 – when the holiday is booked and taken, hours are paid at a rolling 52-week average rate.
10 – 4 hours holiday in April will differ from 4 hours in May!

Here is a simple table to show how accrued holiday entitlement can be tracked and how holiday pay is calculated using this method. You can download this template for free here!

Holiday pay must be precisely calculated and a running total of accrued holiday hours at 12.07% for each pay run must be kept as well as accrual of hours during statutory leave periods using a 52-week average. This can get very tedious, especially if you have lots of employees!

After careful tracking of accrued holiday, the number of holidays must be visible to the worker. Employers must track holiday usage to ensure 5.6 weeks worth of holiday are taken per year.

A process whereby an employee can request holiday hours
A process where the request can be approved
A process where the average rate can be calculated and the accrued hours would then be reduced by the amount of holiday taken
A process where unused holiday hours are carried to a new holiday year where the worker cannot take the hours

Employers only pay based on hours worked, and therefore do not need to front the cash.

Employees are incentivised to take holidays. That’s because if they take a holiday they will still receive equivalent holiday pay to compensate for losing their normal working pay.

Manual vs automated holiday pay

We’ve learned about the two holiday pay methods, but how can these be put into practice? There are two ways in which you can calculate RHP and accrued holiday pay – manual and automated.

Manual pay takes time

For most payroll professionals, holiday pay is manually calculated using Excel, a calculator, or both. This process, rife with potential errors, can take hours or even days for each employee, regardless of the method used.

Manual calculations, especially for larger companies, are time-consuming and inefficient. Many payroll teams use spreadsheets to track holiday entitlements and calculate pay, often requiring multiple professionals to manage the workload. This takes hours, if not days, to calculate holiday pay for each employee, regardless of whether you choose RHP or accrual method.

Use our free resources to make manual calculations easier.

Free holiday pay template Free compliance checker

Automation saves time

With paiyroll^®, holiday pay is completely automated:

Done in minutes

For every employee

Any time, anywhere

More payroll professionals are choosing to automate holiday pay simply because all those complex calculations are done instantly for you. At paiyroll® we use AI technology to convert your employee data into payroll instantly – that includes (but not limited to) holiday pay!

Try our holiday pay companion which plugs straight into your existing payroll system here. A great option if you aren’t ready to switch payroll providers yet.

Holiday pay companion

ai payroll software.
real human support.

paiyroll^® turns your employee data into payroll instantly using automation powered by artificial intelligence.

100% automated payroll for all pay elements incl. holiday pay, tax codes, salary pro-rata, NI and NMW.

Works with API or upload any spreadsheet (no edits needed!).

Payroll processing time is reduced by 75%, saving you 3 days a week!

Try it for free

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Holiday pay: Irregular-hour workers