A recent UK Supreme Court case has confirmed that the 12.07% holiday pay calculation method currently found in zero hours/casual contracts is now incorrect as a method of calculating holiday pay for workers with irregular working patterns.
What was the previous position?
Until recently the method of calculating holiday pay for workers with irregular hours has been to pay at the rate of 12.07% of the hours worked. This was a calculation recommended by ACAS and widely used.
The recent decision of the Supreme Court has resulted in the ACAS guidance being updated to remove reference to 12.07% in zero hours and variable hours contracts.
The new method to use
For workers with no normal working hours, a week’s pay should be calculated by reference to average weekly remuneration in the period of the previous 52 weeks but discounting any weeks in which the worker received no remuneration (the “Calendar Week Method”).
Who does this apply to
• It applies to workers with irregular working patterns (e.g. their hours or days vary per week and/or their weeks vary per year) and pay that corresponds to those patterns. The biggest impact in practice will be on hourly paid workers who have a permanent contract but, for whatever reason, have a number of unpaid non-working weeks during the leave year.
• It does not apply to full-time or part-time workers with regular hours or workers with a fixed salary.
How to calculate holiday pay for zero hours/variable hours employees using the new method:
1. Note how many hours per week the employee worked each week over the preceding 52 weeks (if they have worked for you less than 52 weeks use the full period they have worked for you).
2. Exclude weeks where they were unpaid – in other words, unpaid weeks should not reduce the average.
3. Add up the total number of hours.
4. Divide the total by 52 (or the number of weeks they have worked for you).
5. This will provide your average number of hours worked per week.
6. Multiply your average number of hours per week by their hourly pay.
7. This will provide the average weekly pay for that worker.
Do I have to calculate the average week’s pay just once?
No, the worker’s average weekly pay needs to be calculated every time the worker takes leave as the average weekly wage based on the preceding 52 weeks (or lesser number of weeks) pay period will have changed.
What if I continue to use the 12.07% method?
If you decide to keep applying the flat rate of 12.07% to calculate holiday pay, you may face tribunal claims. In any event, employers may find themselves facing significant claims for underpaid holiday from irregular workers on permanent contracts where the 12.07% method has been used. It is worth noting that claims for holiday pay based on deductions from wages are limited to 2 years of back pay and a break of more than 3 months between payments will break any chain of deductions.
Should you review your contracts?
Yes, you should do the following:
• Review and remove from your zero hours and casual contracts any reference to the former method of calculating holiday pay and ensure your contracts are redrafted in line with the new Supreme Court decision.
• Review those at most risk from this decision, namely workers who are engaged under contracts but who have long periods of time when they are not working, and hire them instead:
o as freelancers or
o engage them on a fixed term contract or
o engage them on a zero hours or casual contract where each engagement terminates at the end of each assignment or project and then make a payment of accrued but untaken holiday on termination of each assignment/project.
If you need a newly drafted zero hours contract or an up to date freelancer agreement do email nicola.goodridge@goodhr.co.uk or call +447917878384
