Holiday Pay guidance changes

Holiday pay entitlement calculation guidance has changed. The changes have a big impact on holiday calculations for many employers and will caused an increase in the administrative burden on payroll departments.

admin By admin - 24.08.2022

What happened?

In May 2019 the court of appeal ruled that using the 12.07% method to calculate holiday entitlement was unlawful in relation to the Working Time Regulations 1998.  The case was Brazel v Harper Trust.  Ms Brazel was a part-time music teacher on a permanent zero hour contract, with varying hours throughout the year, who had her holidays pro-rated according to the amount she worked by her employer Harper Trust, using the 12.07% method. This method was the one both HMRC and ACAS recommend to use, at the time.  The ruling stated that this was unlawful in relation to the Working Time Regulations 1998 and her holiday entitlement should be based on her length of service.

Harper Trust appealed the ruling in 2019. Covid stepped in, but finally on the 20th of July 2022 the Supreme Court gave their ruling on the appeal.  The Supreme Court has unanimously upheld the previous ruling that the 12.07% method is unlawful in relation to The Working Time Regulations 1998.


Key Changes:

  • The 12.07% method can no longer be used to calculate holiday entitlement
  • All employees are entitled to 5.6 weeks holiday regardless of time worked
  • Holiday entitlement should be based on length of service


Please note that the law has not changed due to this case; the law had been previously miss-interpreted.  So, any claims brought against the employer for this, could be backdated.


What’s likely to happen?

It is highly likely that Holiday Pay will be taken over by an enforcer in due course. A governing body to oversee employer compliance to the regulations and law surrounding holiday pay. It is likely to be similar to what is currently in place for National Minimum Wage.  Whereby, the governing body identifies non-compliance, issues penalties, and names and shames non-compliant employers.  If an employee takes you to court then it’s just that employee's situation that will be looked at.  With an enforcer, then all employees are looked.  The claimant employee, may end up having been paid correctly, but it may be discovered that other employees have not.  The employer would then need to pay the under payment to the employees affected plus face fines/penalties from the enforcer.


How should Holidays for adhoc contract/term workers be calculated?

Holiday entitlement for zero hour contract/term time workers should be calculated based on their length of service.  Therefore, if they’ve been employed for the full holiday year, the employee will be entitled to 5.6 weeks holidays (28 days, or 29 days for this holiday year if entitled to the extra Statutory Holiday for the Queen’s Jubilee).  This can be pro-rated for new starts and leavers.  For example, the employee may just work 1 month for you, but if they are continuously employed for the full holiday year, then they are entitled to the full holiday entitlement of 5.6 weeks.

Holiday pay should be calculated on the daily average hours and rate, based on the average hours and rate over the last 52 weeks, where work had been done (if there are weeks where no work was done you would need to keep going back until 52 weeks is achieved, or however many weeks are available. You don’t need to go further back than 2 years).  This should be up to the Saturday prior to when the Holiday was taken.  If the employee is on a fixed rate, then the Holiday hours should be paid at the employees most recent pay rate.  If the employees rate changes, i.e. higher rate for overtime, then the average rate needs to be calculate as well.

The weekly average hours are then calculated by totalling the hours from the relevant weeks and dividing by the number of weeks where hours were worked.  You then take the average weekly hours and divide by 5 working days to get the daily average.  The average rate can be calculated by adding up the amount paid for those hours, divided by the total hours.  The daily average is worked out by multiplying the daily average hours by the daily average rate to get a daily average Holiday pay amount.  The daily average Holiday pay amount can then be multiplied by the number of days Holidays.  The number of Holiday hours to pay should be rounded up to the nearest 2 decimal places.

(Many employers have set working weeks, for example Monday to Sunday, or may not have this information, practically, available in time for the processing of the payroll.  Although the letter of the law states that the average hours need to be up to the Saturday prior to the date the Holiday was taken, there is scope for argument for slight variation, as long as it is consistent, fair and a legitimate reason can be proven.  This would need to be a decision made by you, as the employer).

Overtime, which is regular and/or required to fulfil their contracts, needs to be included in the 52 week average hours calculation.  For example, if the employee only works overtime once or twice a year and the employee can refuse the overtime, then there’s no requirement to include.  Any other payments that make up an employee’s normal pay would also need to be looked at for Holiday pay calculations.

Holiday entitlement should always be rounded up to the nearest half day, and holiday pay should always be rounded up too.

[Refer to HMRC and ACAS for full amended guidance]

It is the employer's responsibility to ensure employees take their full Holiday entitlement.   Employees have to take time off in order to be paid Holiday pay.  The only exception to this is when the employee leaves.


If you have question on the changes mentioned above or on payroll in general, get in touch



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