Could the Government’s consultation cut through the holiday pay chaos?

The Government has launched a consultation on calculating holiday pay entitlement.

New consultation on calculating holiday pay.

This consultation will be of interest to readers whose responsibilities include payroll. The stated aim of the changes proposed in the consultation is for holiday pay to be calculated consistently for all workers, with holiday pay proportionate to the time actually spent working. In practice, this would mean a return to the 12.07 percent formula. The Government hopes that legislation will provide clarity to workers and employers, so that holiday entitlement is calculated consistently. Employers are being asked to consider whether they agree the proposals are fair and will simplify the approach to holiday pay calculations. Holiday pay and entitlement legislation has become complex and for many employers, it is challenging to pay workers in line with the constantly evolving case law. Many will agree that holiday pay needs reform. One of the most critical questions which hasn’t been posed is whether the proposed reforms go far enough to reduce the notorious complexity. 

Why has the consultation been launched?

The Supreme Court in Harper Trust vs Brazel (July 2022) held that the typical 12.07 percent holiday pay formula applied to part-year workers, which calculates holiday based on the actual hours, was incorrect. Instead, holiday pay should be calculated applying the calendar week method, which involves multiplying the average week’s pay by 5.6, by reference to the previous 52 weeks (excluding weeks of no work).

The Government is concerned about the impact of the Brazel judgment, as it creates a disparity between workers and additional cost for employers:

  • Part-year workers are entitled to a larger holiday entitlement than part-time workers who work the same total number of hours across the year; and
  • Estimates are that holiday entitlement has increased for:
    • Between 320,000 and 500,000 permanent term-time and zero-hours contract workers; and
    • Between 80,000 and 200,000 agency workers.

The Government is seeking views on proposed changes which are aimed to deliver simplification, fairness and consistency for workers. Namely:

  • Introducing a 52-week reference period for part-year and irregular hours workers based on the proportion of time they spent working. This reference period would use the most recent 52 weeks, including those weeks without work;
  • Legislating for the 12.07 percent formula. Holiday pay entitlement will be calculated by multiplying the total hours worked over the previous 52 weeks by 12.07 percent. This is equivalent to 5.6 weeks of holiday /46.4 working weeks expressed as a percentage;
  • For workers with at least 52 weeks’ service, holiday pay entitlement would be calculated by reference to a fixed reference period based on the previous 52 weeks, giving a fixed pot of annual leave at the start of the holiday year;
  • For workers with less than 52 weeks’ service, holiday pay entitlement would be calculated at the end of each month based on actual hours worked. Put simply, it would be 12.07 percent of the hours worked in the previous month;
  • Calculating the number of hours an irregular hours worker will use by taking a whole day off based on a flat average working day; and
  • Calculating holiday entitlement for agency workers at the end of each month whilst they are on assignment as a percentage (12.07 percent) of their hours worked.

The consultation will be open until 9 March 2023. We want to hear your views! Please contact the authors or your normal KPMG contact if you have any thoughts you would like to feedback on this complex issue.