Legal Update | Holiday pay law overhaul

  • Employment Law
Kate Palmer FCIPD - Director of HR Advice and Consultancy at global employment law consultancy, Peninsula.

Kate Palmer, HR Advice and Consultancy Director

(Last updated )

In April 2020, how you calculate holiday pay for some workers is going to change.

It’s part of the largest upgrade to workers’ rights in a generation, and you may have to pay out more for your staff’s annual leave…

How to get holiday pay right

Calculating holiday pay for fixed-hours employees is easy. If you pay an employee £400 for a full week’s work, then you need to pay them £400 a week while they’re on holiday.

For staff with varied hours—such as workers on zero-hour contracts whose pay packet varies from week to week—it’s more complicated.

Rather than give these workers a fixed amount, you calculate holiday pay based on their weekly earnings.

Until April 2020, you do this by taking the average pay of the 12 weeks before your worker's annual leave. But from the 6th April 2020, this will change.

That’s because the holiday pay reference period is going up to 52 weeks, so you need to take an average of wages across the whole year.

What this means for your business

For your staff, this change means more consistency in their holiday pay. The new law will average out peaks and troughs in working hours caused by busy or quiet periods at work.

It also means that you may need to pay workers a little bit more. That’s because their average pay will always include your busiest time of year.

Obviously, no one wants their staff overheads to go up. The good news is that any increase to workers’ pay should be relatively small. Instead, the greatest challenge to business owners will come from the extra admin and legal risk…

Tracking workers’ hours

To calculate holiday pay accurately, you need a detailed 12-month record of an individual’s working hours and pay.

It can be challenging to keep track of staff hours when your people work different times each week, but it’s important to get it right. Holiday pay is a ‘statutory right’, so if you accidentally underpay your workers, they may take you to a tribunal.  

Fortunately, HR software makes it easy to keep accurate records of work hours. Some tools, like Blip from BrightHR, even allow your staff to track their time at work by clocking in and out using their smartphone.

Then, you get a detailed report of your people’s exact working hours, making it easier for you to calculate the right holiday pay.

Online staff management tools also help you keep track of staff who work extra hours. You need to record these hours carefully because the rules around overtime holiday pay have changed, too.

Adding overtime to holiday pay 

You need to factor compulsory overtime into holiday pay—that’s any overtime guaranteed in your employees’ contracts. And thanks to an employment tribunal ruling in 2019, you may need to include voluntary overtime, too.  

You only need to do this if voluntary overtime is “sufficiently regular and settled”. What counts as “sufficiently regular”? Unfortunately, the ruling isn’t clear: you need to decide on an individual basis.

If you think that you’re affected by this change, seek professional support. Our HR advisers help you determine if you need to include voluntary overtime in your holiday pay. Call us on 0800 029 4384

And there’s more…

Remember, the change to holiday pay is one of many employment law updates to hit UK businesses in April 2020.

How you issue employee contracts will change, the National Living Wage will go up to £8.72 an hour for workers aged 25 and above, and statutory sick pay is set to rise to £95.85 per week. 

If you’re a Peninsula client, you don’t need to worry. Because we help prepare you to meet these employment law changes without disruption to your business. 

And if you’re not a client, you can still get a free advice call to help you keep your business safe. Speak to an HR expert today on 0800 029 4384

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