New Holiday Pay 12.07% – not as easy as you think!

psimonparsons

Dec 31

Many employers and even payroll professionals have welcomed what some claim is a return of the 12.07% holiday pay method of operation which was ruled unlawful by the Supreme Court as not meeting the requirements of the Working Time Regulations (WTR) and the Employment Rights Act (ERA) method of calculating the weekly average earnings for holiday pay.

The former operation and its problems?

A sizeable number of employers used to operate a scheme described by ACAS which attempted to mimic the application of WTR 13 (4 weeks for EU law) and 13a (1.6 weeks addition for the U.K.). So taking 52 weeks in a year (actually there are slightly more), it proportioned the weeks worked versus 5.6 weeks paid leave to derive the 12.07% rate.

However, ERA requires exclusion of zero pay weeks, and also weeks of statutory leave from an earnings average. This is where the 12.07% failed.

Equally. Many who used the method only applied to contract or basic hours and not all hours or all pay received by the employees. This led to underpayments of holiday pay to a sizeable proportion of UK workers and employees. Statistical data showed that around 1.7 million were being denied their statutory minimum holiday pay entitlements amounting to £1.7 billion.

So what's so complex about the current legal requirements

Under WTR, all are entitled to 5.6 paid weeks holiday leave per annum.

Mid year starters are required to have their entitlements pro-rated on a basis of calendar month 1/12ths. This results in a strange concept that is hard to Phaethon for many employers with a reaction of denial of the law being correct.

Just to illustrate. If an employee joined an employer on the last day of the holiday year, for example 31st December and work 1 day, they would accrue a holiday entitlement for December of 1/12th of the annual entitlement and rounded up (never down) to the half or full day.

So based on a 5 day standard working week:

28/12 and rounded up = 2.5 days paid leave

But they have only worked 1 day! However, that is the current requirement of WTR.

The other aspect is the calculation of the average weekly earnings, prior to April 2020, this was required to be based on a 12 week earnings average excluding zero pay weeks. This is still the case for Northern Ireland but not fir Great Britain. the average would have been required under ERA to be based on earnings (whether paid or not) that relate to work up to the prior Saturday to the leave being taken.

This now causes serious calculation challenges for the majority of employers who do not pay their employees and workers on a weekly basis or pay in arrears. Holiday pay law as limited acknowledgement that anyone is paid other than weekly, there are no accommodation of other pay frequencies.

And then from April 2020, the GB calculation under ERA changes from the former 1# week average to a new 52 week average earnings excluding zero pay weeks.

Employers were forced to take pragmatic decisions to derive as close a value as they could achieve using prior actual earnings. Are these 100% compliant, potentially not, but they will be close with potential under and over resulting amounts.

And of course, not everyone works the same number of days or hours each week and there has been an increase in zero hours or irregular hours working. Many employers struggle with the concept of week and days, they are drawn to use hours by instinct but the calculations are wrong and not aligned with either WTR or ERA as a basis of what a week is hard to define.

Then there were differences in what pay has to be included in average earnings between EU defines law (4 weeks leave): the UK added 1.6 weeks and any additional entitlements provided by employer schemes. The WTR acts as a minimum, some employers do pay more.

So what is changing and when?

Changes which come into force on 1st January 2024 give employers an option for some workers and employees in relation to holiday years which commence on or after 1st April 2024. This means fir many that consideration of the new methods is delayed until 2025 (for example, holiday years which run from January through December).

This new law allows employers to apply one of two optional schemes but only to employees and workers that can be classified as irregular hours or part year workers.

This brings into play a new:

12.07% method of holiday entitlement hours accrual with rounding, or
12.07% method of Rolled Up Holiday Pay (RHP)

Is this the same as the former 12.07% that was used by many employers? NO or it is doubtful to be exactly the same.

Does it remove the need for complex average holiday pay calculations? NO or not necessarily as it has averaging requirements to cater for:

New Accrual basis

For irregular hours and part year workers for holiday years commencing on or after 1st April 2024.

A round up or round down of holiday hours accrued in a pay period basic on all hours worked
The hourly holiday pay rate - a 52 week rolling average of earnings divided by hours to obtain the holiday hourly rate
Sickness and Statutory Leave - a 52 week rolling average of the holiday accrual amounts to derive a value to accrue during these periods

New Rolled up Holiday Pay basis

An alternate option to accrual for irregular hours and part year workers for holiday years commencing on or after 1st April 2924.irregular hours and

Top-up payment of RHP - a 12.07% pay top-up each period based on all earning
Sickness and Statutory Leave - a 52 week rolling average of the prior RHP amounts to then be paid as a top-up during these periods

As this is law, payroll software should do this and for free!

Holiday pay law is subject to many interpretations and almost no two employers do exactly the same. As with many complex law situations, these changes will impact employer scheme rules and potential employment contract terms.

Will your legal department or employment solicitor change all your policies and contracts for free? Often with changes in legislation which place obligations on business, the business will have associated obligation costs. Developing payroll software costs money, with costs being shared acoros multiple employers.

Holiday schemes need configuration to identify the relevant hours and what earnings are to be used. And then there are the averaging calculations based on historic data. Often historic data changes which adds layers of complexity. Plus , holiday pay law requires data to be included which may relate to hours and amounts that have not yet been paid.

So would payroll do this for free. We would suggest no, there will be cost implications in changing, those impact the legal requirements of the business, Human Resource Management on establishing and communicating the revised policies and also dealing with enquires, challenges, errors and resolution, and then payroll knowing what to do, obtaining suitable software along with HR and applying the configuration and required historic data. This requires effort, suitable planning, implementation and funding. There are likely to be costs for complying with the changing legal obligations.