New regulations governing holiday pay and entitlement could come into effect for companies with a calendar holiday year in January. Samantha O’Sullivan of the Chartered Institute of Payroll Professionals (CIPP) explains how employers will be affected.
Following the holiday pay reforms announced in January 2024, employers need to be mindful that calculations for holiday entitlement and pay could change for those whose holiday year starts from January 2025.
Everyone who processes a payroll is hopefully aware that the Department for Business and Trade (DBT) has issued guidance on these changes to the working time regulations. But what does that mean to you, and how will it affect your payroll?
The aim of the reform is to simplify holiday entitlement and holiday pay calculations for irregular hours and part-year workers.
What has already been introduced?
Previously, case law was used to identify the relevant payments to be included as normal pay. Now, legislation will define ‘normal remuneration’.
This would include payments intrinsically linked to performance of work, such as commission; payments relating to professional or personal status such as professional qualifications; and any other regular payments that have been paid in the last 52 weeks, for example overtime.
How do we define irregular hours or part-year workers?
Regulations have been set out to clarify how to calculate holiday entitlement and pay for irregular hours and part-year workers. New definitions of these workers have been created, allowing employers to correctly identify workers and process them compliantly.
Holiday pay
An irregular hours worker is when an employee’s contracted hours are mostly or completely variable. This includes those on casual or zero-hours contracts.
A part-year worker is an employee who is contracted to work part of the year, resulting in periods of at least one week during the year that they’re not required to work and will not be paid.
For example, a seasonal worker who picks fruit in the spring and summer but isn’t contracted or paid to work in the autumn or winter would meet the definition of a part-year worker.
The methods of administering leave as set out below can only be used for anyone who has been identified as an irregular hour or part-year worker.
For leave years that start before 1 April 2024, holiday entitlement will continue to be calculated in the same way, meaning all workers receive 5.6 weeks’ annual leave entitlement, and will be paid for that leave when they take it, using a 52-week average pay calculation.
For leave years which start on or after 1 April 2024, employers can choose to either:
- accrue holiday entitlement as a bank of leave to take as holiday or
- pay rolled-up holiday pay.
Irregular hour and part-year workers that receive 5.6 weeks statutory holiday entitlement will be calculated at 12.07% of actual hours worked in a pay period.
Accruing holiday hours
If you were to accrue leave in a bank, you would work out 12.07% of the hours paid in a pay period. (Hours are rounded down to zero if less than 30 minutes but will be rounded up to one hour if 30 minutes or more. CIPP is liaising with the Department of Business and Trade to establish what happens with rounding down, as the proposed process regarding this doesn’t align with other guidance produced.)
Using this method, employees will need to request the hours as time off, when required. Leave is then paid when taken, using the usual reference period calculation (52-week average) to determine normal remuneration.
Rolled-up holiday pay
The option of rolled-up holiday pay works on the basis that an employee is paid for their holiday entitlement as it’s accrued in that pay period, instead of when it’s actually taken.
Previously, rolled-up holiday pay was deemed unlawful under the working time directive. However, legislation amendments now make rolled-up holiday pay lawful for irregular hours and part-year workers only.
The holiday pay element must be separated out on a payslip, and leave is still required to be given by the employer.
To calculate the value of rolled-up holiday pay, the worker’s total pay in a pay period should be multiplied by 12.07% (statutory entitlement).
The entitlement must be paid each pay period and be shown as a separate line on the payslip, identifying what the payment relates to.
- For example: a worker that’s paid monthly and worked 134 hours at £11.44 per hour:
134 x £11.44 = £1,532.96 total pay for that pay period, which means that - £1,532.96 x 12.07% = £185.03 holiday pay due in that pay period
Accrual on statutory leave
Holiday entitlement will continue to accrue while employees are off on statutory leave i.e. sick leave or family leave.
For employers accruing leave in a bank, a 52-week reference period must be used to calculate an average of hours worked. For the calculation, weeks containing any statutory leave should be excluded, but weeks where there was no work or pay, are included.
Where rolled-up holiday pay is used, you can instead take an average of the holiday pay elements paid in the reference period, including and excluding weeks on the same basis as above.
What should we do now?
In preparation for your commencement date, it’s important to identify the workers that will be affected, decide on the calculation method you will use, and keep communicating with affected employees.
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