By Donna Obstfeld, twice published author and expert in Human Resources (HR) and management at DOHR (www.dohr.co.uk)
The law changed
In July of 2022, the Supreme Court ruled that the percentage method for calculating annual leave and / or annual leave pay for part year workers was illegal. A part year worker may be someone who is on a zero hours, flexible hours or seasonal worker contract.
The decision was that all employees were entitled to a minimum of 5.6 weeks of annual leave which they had to take and be paid for. The challenge then became how much are they paid each time they take leave. The answer is that they must be paid their average weekly salary for each week of leave. To calculate this, you need to recalculate the average weekly salary before each leave period, whether it is a day, 3 days or a week and then pay that amount for the leave period.
To calculate the average weekly pay you use a reference period of up to 52 weeks. You only include weeks where the employee has had some earnings, including previous holiday pay, and ignore any weeks where no money was earnt. You need to go back up to 104 weeks (2 years) until you have 52 weeks of data. If there are not 52 weeks of data, either because they didn’t work enough weeks or because the employee has less than 52 weeks service, you use the weeks available to calculate the average weekly earnings.
This is complicated and has caused uproar across many industries, including the hospitality sector. The administration is complex and extremely time consuming, but this is currently the law and employers must follow the new rules.
There are many issues with the new calculation methods including the fact that two employees working the same hours across the year, one on a part time basis and one on a zero hours basis, can receive different amounts in holiday pay. The zero hour employee will receive more pay and more leave. An employee who works full time for 8 weeks every summer and 3 weeks every Christmas and remains on payroll permanently, will be entitled to 5.6 weeks of paid leave, the same as a full time employee working a full year. The ruling by the supreme court is fundamentally flawed.
However, the Government recognised the problem the ruling caused and launched a consultation which closed on 9th March 2023. They are looking at making changes to the reference period so that the average weekly earnings calculation before each period of leave is based on 52 weeks regardless of whether the employee worked or not. Therefore, in the example above, the total earnings in the 52 weeks prior to leave would be dived by 52 weeks instead of 11 weeks. This gives the employee the same amount of annual leave, but their holiday pay is significantly decreased.
So why are we in limbo?
It is possible that you have overpaid some staff and underpaid others and although those overpaid won’t be offering to pay back the money they have had, those you underpaid may seek to reclaim unpaid holiday pay.
We are however waiting for a change in the law following the consultation. We don’t know exactly what changes will be made, but we know that some of the discrepancies will be removed.
In the meantime, you may need to do several things to mitigate your financial losses:
1. Top up the holiday pay for those you have underpaid, perhaps putting a provision for clawing back the money if the law changes again.
2. Continue to overpay staff taking holiday now, knowing that if the law changes you will have overpaid them. Again a contractual provision allowing you to claw this back may need to be considered.
3. Issue a series of short term contracts each time you employ a seasonal worker, terminating their employment at the end of their contract.
4. Stop using zero hours staff and put them onto a part time contract with fixed hours and match their holiday entitlement to their working patterns and pay.
Whatever you decide to do in the short term, it is important to understand what the employment legislation requires and this isn’t always exactly the same as the financial legislation, so do ensure your payroll is being processed properly.