A guide to holiday pay

In this insight we provide an overview of employee rights with regards to entitlement to paid annual leave.

Under the Working Time Regulations 1998 (WTR) all employees are entitled to a minimum of 5.6 weeks’ paid annual leave, which can include bank holidays. This means that a full-time worker will be able to take 28 days’ holiday per year. A part-time employee will receive an equivalent entitlement, calculated on a pro-rata basis. 

Originally the WTR had provided a right to take 4 weeks’ leave, which is the minimum requirement under the EU Working Time Directive (WTD). It was increased to ensure that bank holiday entitlement was added to this rather than reducing the minimum. 

A week’s leave should allow employees to be away from work for a week. It should be the same amount of time as the working week. However, the statutory holiday entitlement is capped at 28 days, so an employee who works a six-day week would still only be entitled to a minimum of 28 days’ paid annual leave.

The entitlement to paid annual leave begins on the first day of employment. During the first year of employment though the proportion of the leave that can actually be taken builds up monthly in advance at the rate of 1/12th of the annual entitlement each month. Where this calculation does not result in an exact number of days, the amount of leave that can be taken is rounded up to the next half-day. 

There is an implied duty on employers to ensure employees take their leave entitlement. There is no right to carry over the original statutory minimum of four weeks’ paid annual leave from one leave year to the next. If both the employer and the employee agree, some or all of the additional 1.6 weeks of holiday can be carried over to the following leave year.

The employer can set out when the leave year will start, for example, the calendar year 1 January to 31 December. In the absence of any such provision, in most cases the leave year will start on the date the employee commenced their employment. 

If an employee starts work part-way through an employer’s contractual holiday year, the employee’s leave entitlement will be proportionate to the amount of time left of that holiday year.

There is no right for employers to pay wages in lieu of any untaken holidays unless the employee is leaving

Part-time employees

Employers cannot treat a part-time employee less favourably than a full-time employee and therefore the part-time employee needs to be allowed the equivalent entitlement to annual leave, calculated on a pro rata basis, in accordance with the hours they work.

Where an employee works part-time there is a chance that they may not work on the days when some of the bank holidays fall. The easiest way to deal with the bank holiday is to pro rata the entire holiday entitlement, including the bank holiday allowance, and deduct days for any bank holidays which fall on days worked.

Where an employee’s working hours change from full-time to part-time, or vice versa, then holiday entitlement needs to be calculated in accordance with the actual hours worked during the relevant period. Therefore, for any period where an employee works full-time their annual leave entitlement will accrue on this basis, even if this holiday is taken at a later period where the employee is working part-time, and vice versa.

Zero-hours employees

Where an employee is on a zero-hours contract and paid only for the hours worked, they will still be entitled to holiday, however, this is on a pro rata basis.

In this situation, the employee’s entitlement is commonly calculated as a percentage of hours worked. For a 5.6 week entitlement, the percentage is 12.07%. The calculation used is as follows:

• 52 weeks less 5.6 weeks (holiday) is 46.4 weeks (working weeks)
• 5.6 weeks divided by 46.4 weeks is 12.07%.

This means that for every hour worked the employee accrues 12.07% of an hour’s holiday. Therefore it takes just over 8 hours to accrue 1 hour’s holiday. When the employee wants to take their holiday they should request the specific time off and the hourly entitlement should be deducted from the employee’s accrued entitlement.

This approach has been found to be convenient and easy to use for employers.

However, in the case of Brazel v The Harpur Trust [2022], a flaw was highlighted. 

The facts of the case were that Mrs Brazel was a teacher who had a zero-hours contract and was paid holiday at the end of each term using the 12.07% calculation. However, she challenged this as she only worked term time which was typically 32 weeks of the year. The mathematical calculation that applied to workers who would work for the full year did not apply to her. The 5.6 weeks annual leave entitlement had to be divided by her 32 working weeks which then gave a rather different multiplier of 17.5%. 

It was held that that the employer should have not applied the calculation as it had but should have calculated her average pay for the 5.6 weeks holiday pay entitlement which could not be reduced despite her working only part of the year. 

In response the Government has started consultation over a proposal to make holiday entitlement under the Working Time Regulations 1998 proportionate to hours worked. It proposes introducing a 52-week holiday entitlement reference period for part-year workers and workers with irregular hours, based on the proportion of time spent working over the previous 52-week period (including weeks in which no work was done). Holiday entitlement would be calculated in hours at the start of the leave year, as 12.07% of the hours worked in the previous 52 weeks. An accrual system would apply in the first year of employment, whereby at the end of each month the worker accrues leave equivalent to 12.07% of the hours worked in that month. 

However, no date has been given for any changes to be made and currently holiday calculations for employees who are engaged for only a limited number of weeks per year will have to be more carefully considered. 

Annual leave and sick absence

This is a controversial area that has generated a great deal of litigation. 

However, it has now been established that workers on sick leave continue to accrue annual leave and workers who fall sick before or during annual leave are generally entitled to cancel that leave and take it at a later date. Although it is possible and the law does allow for workers to choose to take annual leave during sickness absence i.e. effectively designate part of the long-term sickness absence as annual leave for instance where their entitlement to sick pay has expired. The decision would be that of the employee though as the employer will not be able to force them to take their leave at that time.

In addition, if a worker has been unable to take their paid leave during the leave year due to sickness they may carry over that leave into the following year. However, this right is limited to the 4-week entitlement that is guaranteed under the WTD and is subject to the carry over period being not longer than 18 months following the end of the leave year in which it accrued. 

Annual leave and termination of employment

A payment in lieu of statutory holiday entitlement will only be permitted on termination of the employment.

On leaving employment, the worker should be paid for accrued but untaken leave. If the worker has taken more holiday than they have accrued at the point of termination it may be possible to claim the monies for those holidays back from the worker through a deduction in their final pay but only if there is a clause in their contract of employment that allows for this to be done.

A term in the contract that provides for a nominal payment in respect of accrued holiday pay on termination is likely to be found unenforceable. It should be calculated on the basis of the worker’s normal pay.

A week’s pay

An employee is entitled to be paid for a period of annual leave at the rate of a week’s pay for each week of leave. 

If the employee’s normal working hours are the same every week and his pay does not vary with the amount of work done, the amount of a week’s pay is the amount which is payable under the employee’s contract of employment. 

Where the amount of pay varies with the amount of work done but the normal working hours do not vary, the amount of a week’s pay is the amount of pay for the number of normal working hours in a week, calculated at the average hourly rate of pay payable to the employee in respect of the previous 52 complete weeks.

Where the employee is required to work on hours of the day or at times of the week which differ from week to week so that pay varies, the amount of a week’s pay is based upon the average pay paid and the average number of hours worked in the previous 52 weeks. Weeks in which the employee was not paid because he was not working are excluded and a previous working week is brought into account.

Wages plus

Historically it was standard practice for bonuses, allowances and commission payments to be ignored when calculating a week’s pay for annual leave purposes. Similarly, where an employee had normal working hours, overtime payments were only included in the calculation of a week’s pay where it was compulsory and guaranteed under the contract of employment. 

This meant that it was possible that an employee who regularly received commission payments or worked substantial amounts of overtime would be paid substantially less when taking annual leave.

This was found by the European Court of Justice to be contrary to what was required under the WTD. The UK courts in order to comply have read in further wording to national legislation which has the effect of requiring employers to take into account work-based commission, regular overtime and other payments for work done in the calculation of the holiday pay that is due for the first four weeks of the year.

In practice, this is done by considering the average sums received including commission and regular overtime earned over a reference period. Usually, it is a 52-week period immediately prior to the holiday which is taken into account.

The holiday pay should reflect ‘normal’ pay for the employee. Whether a payment has been received regularly enough to become normal will be very much down to the facts of the particular case. However, it has been decided that a payment for overtime worked every 5 weeks was sufficiently regular to form part of normal pay whilst overtime that was worked on rare occasions over the year was not.

Self-employed ‘workers’

The statutory right to paid holidays extends not just to employees but also to the wider definition of ‘worker’. This means that many who are for tax purposes regarded as self-employed may also be entitled to paid holiday where they are working under a contract to provide personal service to someone who is not their customer or client.

In the case of King v The Sash Window Workshop Ltd it was held that where workers were not provided with a right to take paid annual leave because it was believed that they were outside its scope they will have a right to compensation extending throughout their engagement or to the point they are provided with a facility for leave to be taken.

Currently, there are statutory limits on the recovery of sums due from an employer in respect of holiday pay. Payments are subject to a maximum of two years back-pay, plus there is a further rule that prevents any sum being claimed as part of a series of deductions if there is a gap of more than three months.

These restrictions on recovery of monies for holiday pay may be found to be invalid where there has been no facility for paid holiday provided.