Understanding holiday pay is essential for both employers and employees. While the concept might seem straightforward—employees get paid when they’re on holiday—the reality can be far more complex, especially when considering different work arrangements like part-time, zero-hours, or irregular hours contracts. 

Misunderstanding or miscalculating holiday pay can lead to employee dissatisfaction, legal disputes, or penalties from employment tribunals. Therefore, it’s crucial for HR professionals and business owners to ensure compliance with UK employment law when calculating holiday pay.

This blog post will guide you through how holiday pay is calculated in the UK, the types of employment contracts that affect the process, recent legal developments, and best practices for staying compliant.

Calculating Holiday Pay

1. Fixed Working Hours

For employees with fixed working hours and pay (e.g., 9 to 5, Monday to Friday), calculating holiday pay is relatively simple. They should receive their normal weekly pay when they take a week of holiday. For example, if an employee earns £500 per week, they will receive £500 in holiday pay for each full week of leave taken.

2. Part-Time Employees

Part-time employees are entitled to the same 5.6 weeks of holiday, but it’s pro-rated according to the number of days or hours worked per week. For example, someone working three days a week would be entitled to 16.8 days (5.6 x 3). Pay is calculated based on their average pay over a relevant period (see below for how averages are calculated).

3. Irregular or Zero-Hours Contracts

This is where holiday pay becomes more complicated. For employees or workers with variable hours, the amount of holiday pay they receive is based on their average weekly earnings over the previous 52 paid weeks (not calendar weeks). This is known as the reference period.

If a worker has not been employed for 52 weeks, the employer should use however many complete weeks are available. If any of those weeks were unpaid (e.g., sick leave or unpaid leave), skip them and go further back to complete the 52-week reference.

4. Commission, Bonuses, and Overtime

The European Court of Justice has ruled that holiday pay should reflect normal remuneration, which may include commission, bonuses, and regular overtime. If an employee regularly works overtime or earns commission, these payments should be averaged over the 52-week reference period and included in their holiday pay.

This prevents employers from underpaying staff by only considering basic pay, and ensures that employees aren’t discouraged from taking holidays due to financial loss.

Key Legal Updates and Developments

In recent years, several high-profile cases and legislative changes have reshaped the landscape of holiday pay:

Harpur Trust v Brazel (2022)

This landmark Supreme Court decision clarified how holiday entitlement should be calculated for workers with irregular hours, especially term-time only staff. The court ruled that employers cannot pro-rata the 5.6 weeks holiday entitlement for workers who only work part of the year (e.g., teachers on zero-hours contracts). Instead, holiday pay must be calculated based on the average weekly earnings during the 52-week reference period.

Holiday Pay Reform from January 2024

From January 2024, UK legislation was updated to reflect recent case law. Employers must now include all regular payments such as regular overtime, commission, and allowances in holiday pay. This change underscores the need for HR departments to thoroughly audit payroll systems and ensure all relevant payments are incorporated into holiday pay calculations.

Common Mistakes Employers Make During Holiday Pay Calculations

Despite clear guidelines, many organisations still get holiday pay wrong. Here are some of the most common pitfalls:

• Pro-rating incorrectly: Especially for zero-hours or casual workers.
• Excluding overtime or commissions: When these are regular parts of an employee’s income.
• Using outdated reference periods: Not adjusting to the current 52-week requirement.
• Inadequate record-keeping: Failing to track working hours accurately, particularly for flexible workers.
• Non-compliance with legal rulings: Ignoring precedent set by recent court cases.

These mistakes can lead to underpayments, employee dissatisfaction, complaints to employment tribunals, and reputational damage.

Best Practices for HR and Payroll Teams

To ensure accurate holiday pay and avoid legal complications, HR departments should consider the following best practices:

• Accurate Records: Maintain detailed records of hours worked, types of pay received, and when holidays are taken. This is essential for calculating average earnings accurately.
• Review Employment Contracts: Ensure employment contracts clearly state holiday entitlement and how holiday pay is calculated. This is particularly important for non-standard contracts.
• Audit Payroll Systems: Regularly audit your payroll processes to ensure compliance with current legislation. If in doubt, consult with an employment law specialist.
• Educate Line Managers: Managers should understand the basics of holiday entitlement and pay, especially if they’re approving holidays or managing teams with flexible work arrangements.
• Use Reliable HR Software: Modern HR software can automate holiday accrual and calculate holiday pay based on real-time data, reducing the risk of error.

Conclusion

Remember, Holiday pay is not just a statutory obligation; it’s a critical component of fair work practices. Miscalculating holiday pay can erode employee trust and open your business up to legal and financial risk. With recent legal developments and growing emphasis on worker rights, it’s more important than ever to ensure that your organisation is calculating holiday pay accurately.

Whether you employ full-time staff, part-timers, or individuals on flexible contracts, the principles of fairness and compliance remain the same. Investing the time to understand and correctly apply holiday pay regulations is not just good HR practice—it’s essential for fostering a positive and legally compliant workplace.

Need help ensuring your holiday pay calculations are compliant and up to date? Our HR consultancy offers tailored audits, policy reviews, and software solutions to keep your business on the right side of employment law. Contact us today to schedule a free consultation or download our Holiday Pay Compliance Checklist to get started!

Need help ensuring your holiday pay calculations are compliant and up to date?

Contact Clear Path Solutions for a free consultation or to download your Holiday Pay Compliance Checklist.