Changes to Holiday Pay Calculations: New Calculation Approach

Important updates to how holiday pay is calculated for some workers came into effect in January 2024.

Normal Rate for Initial 4 Weeks

Previously, there was ambiguity regarding what constituted "normal" pay for holiday periods. The latest clarification stipulates that of the 5.6 weeks holiday entitlement, the first 4 weeks of statutory holiday for all employees (and all holiday entitlement for irregular and part-year workers) must encompass regular payments such as commissions, bonuses, and overtime (provided they have been consistently paid over the past year). The remaining 1.6 weeks can continue to be compensated at the basic rate.

Identification of Irregular and Part-Year Workers

The government has offered explicit definitions:

Irregular Hours Worker: Individuals whose paid hours fluctuate throughout the year, as outlined in their contracts. This includes zero-hours contracts but does not include those whose hours are fixed but whose working pattern is irregular, such as rotating shift workers.

Part-Year Worker: Employees who work only for a portion of the year, experiencing periods of at least a week where they are neither required to work and are not paid. (this does not include term-time workers who are paid an annual flat rate.

Accrue-as-you-go System - (Holiday periods that started after 1 April 2024)

Holiday Calculated in Hours, Not Weeks: Holiday entitlement for these employees will be computed in hours rather than weeks. They accrue leave at a rate of 12.07% of the hours worked during a pay period (based on 5.6-weeks) to a maximum of 28 days.

Calculation During Absence: For employees on sick leave or statutory leave, a 52-week reference period is employed to ascertain their average hours worked. This aids in determining the amount of leave they accrue during their absence.

Optional Rolled-Up Holiday Pay: (Holiday periods that started after 1 April 2024)

Employers now have the option to adopt "rolled-up" holiday pay for irregular and part-year workers. Rolled-up holiday pay must be shown separately as an additional amount in each payslip to cover their holiday entitlement, instead of disbursing payment when they take leave.

However, specific guidelines apply:

• The rolled-up pay is determined at 12.07% of their normal pay.
• It is remitted in the same pay period in which the holiday accrues.
• It is based on their total earnings during that pay period.

Note: If your company’s holiday period is January 2024 to December 2024, this will not apply to you until January 2025.

Crucial Notes:

While this method may dissuade workers from taking leave, it remains imperative to encourage them to utilise their entire holiday allowance.

If you do not wish to use rolled-up holiday pay method, you can continue to use the existing 52 week reference period method for calculating holiday pay.

You must check the contracts of the employees at the beginning as starting holiday pay this way may be considered a variation of contract, which may require the consent of the employees.

What Employers Should Do:

• Review Worker Statuses: Carefully assess the work arrangements of all your employees. Use the new definitions to identify those who fall under the new calculation method.
• Communication is Key: Ensure your employees understand their holiday rights and encourage them to take leave throughout the year.
• Beyond Minimums: The government guidelines focus on the minimum 5.6 weeks. If you offer more holiday, the new methods can be adjusted to reflect that.

By understanding these changes, you can ensure you're calculating holiday pay correctly and complying with the latest regulations.

Should you or your company have any queries, you can contact Friend Partnership on 0121 633 2000, email us at enquiries@friendllp.com, or alternatively complete the form below.