Holiday pay reference periods: what changed from 6 April 2020?
The method of calculating holiday pay for workers without normal working hours, and for workers with normal working hours whose pay varies with the amount of work done (piece workers) or according to the time of the work (shift workers), uses a reference period. For example, holiday pay for workers with no normal working hours is calculated as an average of all sums earned in the reference period. This reference period was extended from 12 to 52 weeks in respect of holiday pay due on or after 6 April 2020. What does this mean in practice?
- The reference period was increased from 12 to 52 weeks to ensure that holiday pay more fairly reflects average pay for workers whose pay varies across the year.
- If, in any week, no remuneration was payable, then that week does not count, and an earlier week must be brought in instead (up to a maximum of 104 weeks). Working out which weeks count for the purposes of the reference period is not always straightforward. The government guidance states that weeks when an employee only receives statutory payments (SSP or maternity, paternity, parental, adoption, parental bereavement or shared parental pay) should be disregarded, and earlier ones brought in instead. The position in relation to weeks when someone has received remuneration but has not worked (e.g. holiday pay, contractual sick pay and, it seems, furlough pay) depends on the type of worker. Such weeks would be included for workers with no normal hours of work; but excluded for workers with normal hours of work but variable pay (because for that group of workers, weeks are included in the reference period only if the worker was working, and the remuneration was payable for those hours).
- Where a worker has many weeks without remuneration the reference period is shortened to that number of weeks i.e. if they only work 40 weeks out of 104, then 40 weeks of pay data is used.
- Where a worker has been employed for less than 52 weeks, the reference period will be the number of weeks they have been employed.
- If the first day of holiday is the last day of a week, use the 52 weeks ending with that week; otherwise use the 52 weeks ending with the last complete week before the first day of holiday. For weekly-paid employees, the last day of the week is the day they are paid; for all others it is Saturday.
- The calculation applies in respect of the full 5.6 weeks’ statutory annual leave, not just the 4 weeks’ EU leave.
How does this impact on zero-hours contracts?
The impact of the statutory reference period can be particularly acute in relation to workers on permanent zero-hours contracts. If a zero-hours worker takes holiday after a period when no work has been provided, their holiday must be calculated based on an earlier period during which they were actually working. This potentially enables permanent zero-hours workers to receive a high rate of pay during holiday taken after a period of inactivity.
Traditionally some employers used a 12.07% formula when calculating holiday entitlement and pay for zero-hours workers. This approach was in line with ACAS guidance which has now been removed following the Court of Appeal’s decision in Harpur Trust v Brazel 2019 (discussed in our earlier blog, now appealed to the Supreme Court). Following this decision, although the 12.07% formula could still work for calculating holiday entitlement (i.e. how many hours of holiday are due), it should not be used when calculating holiday pay. Holiday pay must be calculated by using the 52-week reference period.
The position is different in relation to zero-hours workers engaged on a series of discrete temporary contracts rather than an overarching umbrella contract. In this case, the temporary worker would be paid for any unused accrued holiday at the end of each temporary contract; and holiday pay would be calculated as an average over the number of weeks in which they were paid. Holiday entitlement wouldn’t accrue between assignments as there would be no continuing contract.
What about workers with normal working hours?
There is no statutory reference period when calculating holiday pay for workers with normal working hours. Case law suggests that holiday pay for these workers should be based on an average over a period that is ‘representative’ i.e. one which reflects normal working. In practice, even although the amended legislation does not apply to workers with normal working hours, it might result in tribunals being more inclined to view 52 weeks as being ‘representative’, rather than 12 weeks.
This is a tricky area, particularly in relation to zero-hours workers. For more information and to discuss the options, please get in touch with your usual Brodies contact.
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