ShopWorks has spent the last few months working with its customers to make sure they understand the forthcoming changes to the Holiday Pay reference period and updating our platform to make sure we are ready. With just two months until the change comes into force we have decided to share our short guide to help you understand more about the changes that are coming. Hopefully your work force management and payroll providers have kept you in the loop, if they haven’t and you want help, please get in touch.
What is the Holiday Pay reference period?
In simple terms, almost all workers, except those who are genuinely self-employed, are legally entitled to at least 5.6 weeks paid holiday per year as time off from work to rest and re-energise. This entitlement is derived from the Working Time Regulations 1998.
The situation becomes more complicated when a worker does not work fixed or regular hours and so does not receive the same amount of pay each week, month or other pay period. In these circumstances an employer should normally look back at a worker’s previous 12 paid weeks (known as the holiday pay reference period) to calculate what that worker should be paid for a week of holiday.
The Holiday Pay Reference Period is changing from 12 weeks to 52 weeks in April 2020.
What are the principles of Holiday Pay reference period?
- To establish a fair hourly rate that is applied to the number of hours taken as holiday, for staff that have variable working patterns or pay.
- This ensures a worker is paid the equivalent amount for an hour of holiday, as they would for an hour or work.
- The minimum holiday requirement is 5.6 weeks of paid leave per year if you work 52 weeks in a year.
- Workers should not financially suffer for taking holiday. i.e. You should receive the same pay for a week of holiday as you do for a week of work.
- Minimum amount paid for holiday should at least be the average amount paid over the previous 12 weeks (Increasing to 52 weeks in April 2020) where the staff member was paid and was not sick.
How do I calculate the 52 week Holiday Pay reference period?
- Holiday pay reference periods should be calculated as full weeks, from Sunday to Saturday, unless the rota week starts on a different day.
- For any weeks where the worker received zero pay, or which contained a pay rate less than their usual working hourly rate (e.g. statutory sick pay) then that entire week should be skipped and the preceding week should be included in the holiday pay reference period.
- All regular pay that a worker receives is included in the 52 week period. This includes, overtime, commissions, bonuses, premiums and other regular additional payments.
What are Common pitfalls when calculating the 52 week Holiday Pay reference period?
Pitfall 1: Zero Hour Common Pitfalls - Rolled up holiday
- Despite still being widely used, adding a “premium payment” on top of a regular hourly rate, or paying 12.07% in addition to the hours worked, (i.e. paying rolled up holiday) should not be used. *
- The only time that a payment should be made in lieu of a worker taking a holiday is when they have a positive holiday balance when they leave a job.
- 16th March 2006: The ECJ has held in the conjoined cases of Robinson-Steele v RD Retail Services, Clarke v Frank Staddon Ltd and Caulfield & others v Hanson Clay Products Ltd that rolled up holiday pay is precluded by the Working Time Directive. However it also ruled that any payments already made in respect of holidays under a rolled-up holiday pay scheme can be set-off against the payments due during the holiday.
- Using actual hours worked would lead to staff accruing extra time when working overtime.
- If they are paid for overtime, and get extra holiday for which they will also be paid, they are getting a double payment
- If they work less than their contracted hours (are under contracted) they are likely to accrue less than the statutory minimum of 5.6 weeks a year.
Pitfall 3: Accruing on average hours worked rather than weekly contracted hours
- This prevents 52 week average calculations and accurate holiday entitlement balance deductions as there is no understanding of how many hours equal a week.
- Accruing on average hours worked also prevents accurate calculations of accrual value if there are any contract changes during the holiday period.
e.g. if a staff member has a 30hrs per week contract and has accrued 30hrs, we know that is worth 1 week of holiday.
If they move to a 40hrs per week contract, we know we need to adjust the accruals to 40hrs so they still receive their week of holiday so they do not fall below the 5.6 weeks