The Supreme Court has recently clarified the rules on how to calculate holiday pay for part-year workers and it turns out that what many people considered to be the settled practice is wrong.
We thought it would be a good time for a short refresher on how to calculate holiday pay for part-year workers. For guidance on calculating leave and pay for other working arrangements, see our Q&A.
Who qualifies as a part-year worker
The part-year worker in the recent case, Ms Brazel, was a visiting music teacher at a school. She was contracted to work a set number of hours during term times under an annual contract.
Her case is not just relevant to people working in education – similar contracts can be found in all sorts of work which has seasonal peaks, such as retail or warehouse work. These are sometimes called annualised hours contracts. The individual is contracted to work for a set number of hours across the year, distributed according to business need. It is different from a zero hours arrangement because the employer and employee are both committed to the agreed number of hours’ work.
How not to do it
The previously accepted method for calculating holiday leave and pay for part-year workers was to pro-rate it based on the number of days or weeks the employee actually worked. Using this method, statutory paid leave was usually calculated at 12.07% of the average pay earned over the previous 52 weeks.
The Supreme Court has now held that this is not correct.
Calculating holiday pay for part-year workers
The broad approach:
So what is right? The court was very clear. A person working under a permanent contract across the whole year is entitled to the same statutory 5.6 weeks paid holiday as everyone else. To work out the pay for this holiday entitlement, you must apply their average pay over the previous 52 weeks, ignoring any weeks not worked.
If you use payroll software, lucky you! It may be able to work out holiday pay for your staff automatically. Bearing in mind this recent decision of the Supreme Court, it’s worth checking with your software provider that their calculations are based on the correct approach.
If you need to calculate holiday pay yourself, you’ll need to work out the staff member’s average pay over the preceding 52 working weeks and base their holiday pay on this.
You do this by taking the following steps:
- Find the correct 52-week period
Use the 52 weeks in which your staff member has worked their contracted hours immediately before the first day of holiday. For these purposes, you should use the last whole week that was worked ending on or before the first day of leave, starting on a Sunday and ending on a Saturday (unless the staff member’s pay is calculated weekly by a week ending on a day other than a Saturday, in which case the week ends on whichever day that is.
Ignore any weeks in which your staff member has not worked and not been paid, or any weeks in which they have been off work on sick leave and use earlier weeks instead, so that you have 52 in total. You can count back across a maximum of 104 weeks in total to find the correct 52-week period.
Note that if you don’t have 52 weeks of pay data to use, you should use the maximum number of whole weeks of pay information that you have available to you (excluding any weeks where your staff member was not paid).
- Calculate the staff member’s normal pay (in total) over the 52-week period
Add up the following sums paid during the 52 weeks:
- regular commission payments (eg monthly sales commission payments);
- payments for compulsory overtime, ie overtime which your staff member could not refuse under their contract if offered, and regular voluntary overtime, but you should ignore any infrequent voluntary overtime payments; and
- any regular bonuses, such as those that are paid monthly, but not discretionary bonuses (eg occasional performance-based bonuses) or, for example, a Christmas bonus.
- Calculate the staff member’s average pay
To calculate average weekly pay, divide by 52 the normal pay figure you have arrived at by carrying out the steps above.
To calculate average daily pay, divide the normal pay figure by the number of days actually worked over the 52-week period (ie excluding days off and weekends).
To calculate average hourly pay, divide the normal pay by the number of hours actually worked over the 52-week period.
It’s then a simple matter to multiply up the weekly, daily or hourly pay as appropriate for the period of leave.
If your staff member has not yet worked a full week before they take annual leave, instead of carrying out the calculation above, you must determine what amount fairly represents a week’s pay. To do so, you must take into consideration their level of pay, any pay they have already received from you, and what other members of staff doing a comparable role for you are paid.
Helen Turnbull is Head of Strategic Development for the Marketplace at FromCounsel, the specialist corporate legal resource trusted by top global law firms and FTSE 100 companies. Before joining FromCounsel in 2021, Helen was Head of Content at Sparqa Legal. Having previously spent 12 years practising as a commercial and property law barrister, Helen regularly contributes her expertise to Sparqa’s blog.