Navigating holiday pay for zero-hours contracts is often complicated. However, these workers are entitled to paid holiday just like everyone else so getting it right is important to avoid disputes, tribunal claims and reputational risk.
For UK employers, holiday pay for zero-hours contracts can be one of the most misunderstood areas of employment law, particularly when dealing with irregular hours workers. In this article, we explain how holiday pay should be calculated for zero-hours workers and highlight the key areas of confusion and legal risks that employers need to be aware of.
Statutory Entitlement
Under the Working Time Regulations 1998, almost all workers are entitled to 5.6 weeks’ (28 days) paid holiday per year. This also applies if they work irregular hours or occasionally throughout the year. Employers cannot pro-rata that entitlement simply because someone works fewer weeks. This statutory holiday entitlement applies equally to workers engaged under zero-hours contracts, regardless of how frequently they work.
Example: A worker with a zero-hours contract throughout the year is entitled to the full 5.6 weeks’ (28 days) statutory paid annual leave, even if they only worked some weeks.
How to Calculate Holiday Pay
Legislation accounts for the variable nature of zero-hours workers. Therefore, to ensure holiday pay fairly reflects usual earnings for workers, zero-hours holiday pay calculation is based on actual earnings rather than assumed hours. The formula for calculating holiday pay for zero-hours worker is:
A ÷ B where:
- A = Average weekly pay over the previous 52-weeks *
- B = The average number of hours worked by the worker in each week used to calculate A.
* If there are weeks within the last 52-week period with no pay as no work was carried out, these weeks should be excluded and the employer must go back a further number of weeks to ensure the calculation is based on 52 weeks of pay data.
Rolled-Up Holiday Pay
Rolled-up holiday pay is when an employer includes holiday pay within a worker’s regular pay throughout the year, rather than paying it separately when the holiday is taken. Employers are permitted to use rolled-up holiday pay for zero-hours contracts on the basis that those workers are ‘irregular hours workers’ but it is subject to strict conditions and getting it right can be a challenge. It must be:
- Calculated at a rate of at least 12.07% of the worker’s total pay in a pay period. This is the percentage to be used where you provide statutory holiday entitlement of 5.6 weeks to comparable regular hours workers, but should be adjusted upwards if you allow more paid leave than the legal minimum.
- Paid alongside the wages for the work the employee has completed in that pay period.
- Shown as a separate payment on the worker’s payslip.
Employers still have a duty to encourage workers to take their appropriate periods of leave. However, this may be a challenge as they could perceive those periods as ‘unpaid’ leave.
Key Legal Risks
Holiday pay disputes remain one of the most common Employment Tribunal claims brought against UK employers.
Failure to determine the correct holiday pay period and calculation for zero-hours workers can risk the following:
- Employment Tribunal claims for underpayment, potentially resulting in significant financial awards.
- Backdated claims can stretch back several years, resulting in substantial liabilities for previous underpayments.
- Breaches can be treated as unlawful deductions of wages under the Employment Rights Act 1996.
- Non-compliance can result in reputational damage with employees, customers and suppliers.
- Disputes over a worker’s employment status can arise with potentially costly consequences.
Need Expert Support?
As zero-hours contracts become increasingly common, ensuring holiday entitlement is calculated and paid correctly is more important than ever to avoid Employment Tribunal claims. If you require expert support with holiday pay for zero-hours contracts to ensure your calculations and processes are compliant, or if you have any other HR, Employment Law or Health & Safety matter you wish to discuss, EML are here to help! Get in touch on 01942 727200 or email enquiries@employeemanagement.co.uk to speak to one of our expert consultants.