Holiday pay calculation and entitlement for workers on variable hours have created issues for employers, payroll and HR for some time now.

The government has published its response to the consultation on reforms to retained EU employment law. This also includes changes to the holiday entitlement and calculation of holidays for workers with irregular hours or those who work part of the year. The changes will simplify holiday entitlement and calculations for irregular and part-year workers. It will also bring a huge relief to employers, payroll and HR professionals.

“Rolled-up” holiday pay for workers with irregular hours and part-year workers will be allowed under the new legislation. There will be a new system for calculating holiday entitlement.

The term “rolled-up” holiday pay refers to the practice of making an additional payment to the employee on top of their normal rate of pay. The additional payment is for holiday pay. This is instead of the employee taking time off for holiday.

Calculating holiday entitlement for workers with variable hours

EU rules on holiday pay will be retained. The entitlement for workers is 5.6 weeks of holiday (full time equivalent). Four weeks out of the 5.6 weeks must be normal pay and must include overtime and commission. The remaining 1.6 weeks is based on UK law. Payment can be at basic pay only.

In a positive move, the government aims to simplify the calculation of holiday pay for workers with irregular hours or part-year employment. The government will enact legislation to establish an accrual method for calculating holiday entitlement for irregular hours and part-year workers in their first year of employment and beyond. We expect the legislation to come into effect from January 2024. Employers will calculate entitlement at the rate of 12.07% of hours worked in a pay period, rather than monthly providing flexibility.