The holiday season is almost upon us, but for some staff, a holiday for them means a headache for payroll teams. 

All workers (a broader term than just employee) are entitled to holiday pay, whether full time, part time or on a zero hours contract. The amount depends on the usual hours worked, and whether or not there is any agreement by the employer to provide more than the statutory legal minimum.

For a full time worker, the legal minimum holiday allowance is 5.6 weeks a year – being 20 days holiday and 8 days of bank holidays. Things are more complex for part time workers, but the ‘obvious’ approach taken by most employers is often to simply scale this down to reflect the reduced hours worked by a part time member of staff. For example, if a full time employee receives 28 days a year, a part time employee working a regular pattern of 3 out of 5 days would get 3/5 x 28 = 16.8 days per year.

While this approach can work for those on regular, part time hours, it is less helpful for those on variable hours. In these cases, another quick method of calculating holiday pay was the ‘12.07% method’. With this method, the amount of holiday pay would be 12.07% of pay for actual hours worked. (The logic of the 12.07% is as follows - if a full time worker gets 5.6 weeks, that means they actually work 52 -5.6 = 46.4 weeks, and so the ratio of holiday time to working time then comes out at 5.6 / 46.4 = 12.07%.)

A case earlier this year has now muddied the waters for what could be considered ‘part year’ workers, and resulted in ACAS withdrawing the 12.07% advice. Where an individual is on a permanent contract but works variable periods through that year, the 12.07% approach is no longer appropriate and a new method must be used, based on a look back approach. This will affect:

• shift workers – for example those working 2 weeks on, 2 weeks off
• those on term time contracts (such as school teachers)
• those on zero hours contracts who may work some weeks but not others while remaining under contract.  

Under the look back or calendar week method, the employer must look back at the individual’s pay over the previous 52 week period – ignoring any weeks that they did not work – to calculate an average of their weekly pay. These part year workers are then entitled to 5.6 times that average weekly pay.

When an individual works consistently, say, 3 days a week, this should come out as the same result as calculating the individual’s entitlement as 3/5ths of a full time worker. Where the method gives odd results is if someone works, say two weeks (at 5 days a week) in every four. When calculating the average weekly pay, the weeks they don’t work are ignored, so an average of only working weeks will show them as working full time. As a result, they are now entitled to payment for a full 5.6 weeks holiday a year under the calendar week method, and not the expected ‘pro-rated’ amount of 2.8 weeks.

This is a very complex area and employers who have workers on permanent contracts, but where the worker has periods of work and non-work, and who have been using the 12.07% (or any method other than the calendar week method) should take advice about whether this change of approach will affect holiday entitlement in the future. Employers should also take advice on whether they could be open to back dated claims for holiday pay for up to two previous years.

Further guidance and calculators can be found on the ACAS website.