The ongoing curse of the holiday calculation

Please note, legislation has been updated in regards to holiday calculations since this article was written, effective for holiday years starting on or after 1 April 2024, so some of this information may be out of date. If you’re a Moorepay client, please contact us if you need guidance. Otherwise, please see this article on the changes for more information. 

The Court of Appeal has said that the way employers are calculating holiday entitlement is potentially wrong. In a long and detailed judgement, the Court of Appeal stated that whilst you can pro rata holiday pay, you can’t pro rata holiday entitlement.

Since the law changed back in 2007, calculating holiday entitlement has been relatively easy. 5.6 weeks or 28 days for a full-timer and pro rata that for a part-timer. So, someone who works two days a week gets two fifths of the entitlement:

• Divide 28 (full-time statutory entitlement including bank holidays) by 5 (days in the working week) = 5.6
•  Times 5.6 by 2 (the number of days the part-time worker does)
• That equals 11.2 days’ holiday each year

And if someone worked three quarters of the year (e.g. a term time worker at a school), they’d get three quarters of a full timer’s holiday entitlement. So 21 days, right? Well, no, not any more. The Court of Appeal last year said that’s potentially wrong!

You can pro rata holiday pay but you can’t pro rata holiday entitlement

You may well have relied on the useful ACAS formula for calculating holiday entitlement. It said holidays based on 12.07% of pay/hours were fine. Except that, last year, the Court of Appeal disagreed. As a direct consequence, ACAS removed all references to 12.07% calculations and the irregular hours holiday calculator vanished from government websites.

In a long and detailed judgement, the Court of Appeal said that whilst you can pro rata holiday pay, you can’t pro rata holiday entitlement. Everyone is entitled to 5.6 weeks annually as a minimum.

The term-time worker that undertook 39 weeks’ work potentially gets more than three-quarters of the full-timer’s holidays. The Court of Appeal effectively said that you take the 39 weeks and then add 5.6 weeks’ holiday, leaving 7.4 weeks as unpaid leave. They said that providing less than a full-timer was unlawful; providing more was not. It was a “windfall” for the part-timer even if it provided a betterment over the full-timer.

Then there’s the calculation of holiday pay itself. This has become increasingly complicated – especially staff working irregularly. Now you must take account of compulsory and regular overtime, bonuses, commission etc.

From April 2020, the government is increasing the holiday pay reference period to 52 weeks

And in April there’s yet another change. Instead of calculating holiday pay as an average over the last 12 weeks worked, you’ll calculate it over 52 weeks. This may actually be helpful “smoothing” seasonal variations in leisure, hospitality, tourism, catering etc. You can read more about this change in our recent blog.

Now may be an opportune moment to review how you calculate holidays and holiday pay for anyone working irregularly. The biggest problem is with what the judge called “part year workers”.

Examples of part year workers

Term time staff – Normally applicable to support staff in schools and also those working family-friendly flexible hours. Let’s take a typical example of someone working 39 weeks per year. The sum would be 39 + 5.6 = 44.6 and the remaining 7.4 weeks is unpaid leave.

Variable hours staff – These are permanent staff with no fixed hours. Hours vary from week to week. Sometimes they may not work at all in a particular week. They too are entitled to a minimum of 5.6 weeks’ holiday and you work out holiday pay by counting back the last 12 weeks worked (52 from April) and averaging this.

Casual workers – These are people you may have on a list e.g. to undertake occasional emergency, sickness or holiday cover. The most important thing is that there must be no mutuality of obligation. You don’t have to offer them work and they don’t have to accept any you do offer. This is the group that’s likely to get you scratching your head the most.

You give them a few days’ work in a year. Surely you don’t have to give them 5.6 weeks’ holiday on top? Well, see our casual worker holiday entitlement calculator to find out.

What did the Court of Appeal say about casual workers?

In the Court of Appeal’s considerations, this was actually something that cropped up. The example was exam invigilators that did a few weeks’ supervision per year. Lord Justice Underhill suggested the way round this was to use “freelancers” (because someone supposedly self-employed does not get holidays). Frankly, this suggestion was absolute nonsense. There has been a procession of tribunal and court cases that have determined those undertaking such “gig” work are likely to be workers (and therefore entitled to holidays).

Beyond this, HMRC routinely scrutinises the use of self-employed contractors anyway. It’s common for them to challenge self-employment.

Casual work probably calls for a pragmatic approach. Because there is no mutuality of obligation, it is fair to consider each assignment as entirely separate. The only work the individual is guaranteed is the assignment they are currently undertaking. You may offer no further work and they may decline any you do offer. Thus there is no continuity of employment.

How should I calculate holiday entitlement going forward?

You may decide that using the old 12.07% calculation is still relevant. This may be quick, convenient and uncontentious with staff. But using it is clearly not without risk.

Or you may decide to use a formula based on:

• 261 working days per annum (365 days less weekends)
• Minus 28 days statutory minimum holiday provision
• Equals 233 working days per year
• 28 days holiday divided by 233 days equals approximately 0.12 of a day’s holiday for each day worked

For example, if someone worked a two week assignment (that’s 10 working days), you’d provide 10 x 0.12 = 1.2 days’ holiday for the assignment.

The case that prompted all this may go to the Supreme Court. Once out of Europe, the Government may even change the law. One would like to believe sense will prevail, eventually!

Next steps

Moorepay customers who’d like support calculating holiday entitlement can contact our Advice Line on 0345 073 0240. If you’re interested in finding out more about our HR Services you can contact us or download our brochure.