The UK’s holiday pay reference period for variable working hours will change in 2020: what do employers need to know?

In April 2020, the reference period for calculating holiday pay in the UK will change. The move comes as part of the UK government’s ongoing effort to improve transparency between employers and employees, and will particularly affect employees who work variable hours: those in seasonal roles or on zero hours contracts, for example.

Under the current system, those types of employees can be disadvantaged by taking holiday after quieter periods of work. From 6 April 2020, The Employment Rights (Employment Particulars and Paid Annual Leave) (Amendment) Regulations 2018 will introduce rules to address that disadvantage. With that date approaching, employers should take steps to implement the necessary changes in their payroll.

Holiday Pay Reference Period

Under the UK Working Time Regulations 1998, employers must give their employees 5.6 weeks of holiday leave every year (calculated pro-rata for part-time employees). When managing leave for employees with variable work hours, employers currently use a reference period of 12 weeks to work out the appropriate amount of holiday pay. More specifically, the average pay from the employee’s last 12 weeks of earnings (discounting other leave, statutory payments, or nil earnings) is used to determine the pay that they receive for their leave.

The problem with that calculation method, however, is that it often puts variable hours workers at a disadvantage, especially when they take their leave after slow periods of work. Similarly, that method incentivises employers to encourage their employees to take leave in these quieter periods: both issues have implications for equality and fairness in the workplace.

What Has Changed?

From 6 April 2020 the reference period for calculating holiday pay for variable hours workers will increase from 12 to 52 weeks.

The 52-week reference period will function in the same way as the previous 12-week period:

  • Employers must count back across the last 52 weeks that the employee has worked, and received pay.
  • Weeks in which no pay was received will not be counted towards the 52-week average.
  • In situations where employees have worked for less than 52 weeks, employers should use as many full weeks of work as possible to calculate holiday pay.
  • Contractually obliged overtime worked during the reference period must also be included in holiday pay.

What Should Employers Do Now?

The implementation date for the new reference period is on the horizon, so employers should begin payroll preparations now. In more detail, those preparations include:

  • Ensuring procedures are in place to record voluntary overtime from 6 April 2020.
  • Assessing which pay components will be covered as part of the reference period.
  • Training payroll employees in the new regulations.
  • Seeking insight and guidance on any legal or HR challenges.

The UK government is expected to release further official guidance on the holiday pay changes closer to the implementation date.

Find out more about the UK payroll and tax system by browsing activpayroll’s Global Insight Guide to the UK.

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