BDO’s employment tax specialists are often called to examine holiday pay calculations in the course of reviewing an employer's compliance processes, be that prompted by routine housekeeping or a specific challenge from workers or during a corporate transaction.
Until recently, for employees who work for only part of the year, these calculations would likely reflect one of two approaches:
- The percentage method – using statutory entitlement as a percentage of the total working weeks in a year i.e. 5.6 weeks/46.4 weeks = 12.07% (following common practice, in line with guidance from the BEIS and ACAS).
- The pro-rata method – reducing holiday pay on a pro-rata basis to correspond with the working pattern. For example, 34 weeks worked would equate to 34 weeks/52 weeks multiplied by 5.6 weeks holiday at the hourly rate.
As a pragmatic solution to the Working Time Regulations 1998 (WTR) - which requires that all workers are entitled to 5.6 weeks holiday per year but makes no alternative provisions for pro-rating it to cater for this group of workers - it has been a case of, so far so good!
The new approach for workers with irregular work patterns
Following the July 2022 Supreme Court decision in the case of Harpur v Brazel, which confirmed previous decisions in the Employment Appeal Tribunal and Court of Appeal, employers do, however, now need to keep in mind that such an approach no longer works.
Essentially, the Court's decision was that employees are entitled to 5.6 weeks holiday pay calculated in line with the WTR, including those on permanent part-year and irregular hours contracts, and that this should not be reduced on a pro-rata basis for part-year working.
Therefore, employers should not have been using and should not continue to use either the percentage or pro-rata method referred to above where they have employees who are employed for a full year but only work for part of that year!
This change impacts those working under zero-hours contracts, term-time employees, bank staff, etc. Holiday pay for full time employees or part time employees with regular hours can continue to be calculated using one of the two traditional approaches.
Holiday pay must be calculated at the rate of "a week’s pay in respect of each week’s leave" which, for an employee with no normal working hours, will ordinarily mean working out an average weekly pay based on the pay received over the last 52 weeks actually worked, i.e. you ignore periods when no work was carried out.
This means looking back prior to the date the employee takes their leave for up to 104 weeks to obtain the details for weeks actually worked. It also creates the potential for anomalies e.g. an employee who earns, say £500 for just one week's work under a permanent contract of employment will have an entitlement to £2,800 of holiday pay (£500 x 5.6 weeks)!
How BDO can help
Clearly, calculating holiday pay and remaining compliant remains not without its challenges. If you have any concerns BDO will be happy to review your calculations. We also recommend speaking to your employment law adviser to ensure that any historic risks can be addressed, and contracts are reviewed appropriately.
If you have any questions, contact Gerladine Browne or Renee Dawson.