Calculate holiday pay for zero hour contracts.

Basics on zero hour contract holiday pay

Zero-hour contract workers are entitled to statutory holiday pay, just like their full-time counterparts. However, the variable nature of their work hours calls for a unique approach to calculate holiday pay. As part of your shift planning process, you may have employed people using this approach so it's important to understand the ins and outs of the holiday they require so you are not left in surprise later and the employee receives the legal holiday allowance.

Now recognised as casual workers, zero-hours workers are those whose work hours are not guaranteed through a contract. Previously, these flexible contracts were known as zero-hour contracts. However, the term now applies to what are known as variable-hours contracts. Variable hours workers often hold permanent positions but their weekly working hours can vary, reducing the mutual obligation for work between the employer and the employee.

The calculation of holiday pay and other entitlements is significantly influenced by this distinction. The uniqueness of zero hours contracts lies in their flexibility, making them a popular choice in various sectors but especially hospitality, retail and leisure. Like all workers in the UK, zero-hours contract workers are legally guaranteed 5.6 weeks of paid holiday annually. This entitlement calculation has changed recently.

Holiday entitlement calculation for holiday years starting before 1st April 2024

The most commonly used way to calculate holiday entitlement in recent years has been the 12.07% rule where employees earned 12.07% of their hours back in the form on holiday. However in the Harpur v Brazel court case, the Supreme Court unanimously rejected this method for calculating holiday pay, saying that it contradicted the Working Time Regulations. The Regulations says all workers are entitled to 5.6 weeks holiday, regardless of how regular their hours are, so a pro-rate approach such as the 12.07% does not meet this standard.

The government established a zero hours contract holiday entitlement calculation which looked at a reference period of 52 weeks. The reference period should include the workers average weekly hours and pay in the 52 weeks immediately prior to the holiday period, ignoring any weeks the worker did not receive pay. In some cases you may need to go further back than 52 calendar weeks to find this information because there are likely to be weeks where the worker received no pay.

1️⃣ Once you calculate the number of hours worked in total for the reference period, you can divide that number by the number of weeks worked which will give you the average number of hours worked per week - or in other words, what a average week looks like for that person who works irregular hours.

For example, Tony has worked 1040 hours in the 52 week reference period. He doesn't work fixed hours or have a regular working pattern but the rule says we need his average hours worked per week, which is 20 (1040/52).

This means that Tony is entitled to 5.6 weeks of his average week. He's entitled to 112 hours of holiday per year (20*5.6)

2️⃣ The next step is to work out the average pay rate Tony received in the reference period. Knowing a worker's average pay will tell you what rate of pay they should should receive for the paid holiday.

Let's assume that Tony has received various different rates of pay throughout the reference period. We need to total the weekly pay and divide it by the actually number of weeks he worked to provide his average weekly pay.

So let's assume that Tony's total pay is £11,440. We can divide that by 52 (the number of weeks he has worked in the reference period) to get an average week's pay received of £220. We can then divide that by 20 (the average number of hours worked) to get an average hourly pay of £11. This is the hourly rate which Tony should receive for the accrued holiday.

Problems with the method used for holidays years before 1st April 2024

This above method can result in your casual workers earning a proportionally higher holiday entitlement than their full time employees and even part time colleagues on regular hours permanent contract. Because everybody is legally entitled to 5.6 weeks holiday, casual or part year workers can actually end up with a huge amount of accrued holiday compared to the hours they have worked.

For example, a worker who has only worked four weeks all year at an average of 10 hours per week is entitled to 56 hours of holiday (10*5.6).

This is why dealing with zero hours contracts is currently a messy situation and it's often beneficial for employers to avoid using them. Instead, consider giving a permanent contract to an employee which provides the minimum amount of hours per week that you can commit to.

Holiday entitlement for holiday years from 1st April 2024

However from 1st April 2024, the 12.07% rule is now allowed again. Under the 12.07% rule, holiday pay is calculated by multiplying the number of hours worked by 12.07%. For example, if a zero hours contract worker works 15 hours per week, they would be accrued 1.8 hours' holiday pay per week.

12.07% is used because 5.6 weeks holiday is 12.07% of the hours worked by a full time worker (working all year). Under this method part-year and casual workers only receive a pro rated entitlement to annual leave.

So follow the below steps to work out the holiday hours accrued and the pay rate.

[b]1️⃣[/b] Calculate Holiday Entitlement: For casual workers, holiday entitlement is 12.07% of hours worked. Formula is: Holiday Entitlement (hours) = Hours worked in the period x 12.07%. Example: If a worker has worked 100 hours, their holiday entitlement would be 100 x 0.1207 = 12.07 hours.

2️⃣ Calculate Holiday Pay: Holiday pay is based on average pay over the last 52 weeks. To find the holiday pay rate use the formula: Holiday Pay Rate = Total Pay over 52 weeks / Total Hours worked over 52 weeks.

3️⃣ Then multiply the holiday entitlement (hours) by this rate to find the total holiday pay. Example: If a worker’s average pay rate is £10 per hour and they have 12.07 hours of holiday, the holiday pay would be 12.07 x 10 = £120.70. Make sure the pay rate after April 1st 2024 is at least the new National Minimum Wage (NMW) rate for the worker’s age category as per the latest government guidelines.

Holiday pay on termination

If a zero-hour contract ends, there are certain rights and entitlements that the worker is still eligible for. This includes payment for untaken statutory leave entitlement or ‘accrued leave’. Zero-hour workers have the right to be compensated for accrued but unused holiday time when their employment ends. The pay owed is calculated based on the accrued holiday time that has not been taken during the current leave year.

For casual workers, the rolled up holiday pay is typically paid out at the end of their assignment due to the non-continuous nature of their work. This ensures that they receive their due compensation even if their contract ends abruptly.