Calculating holiday pay for casual workers

Our accounting partner shares holiday pay advice for businesses employing casual workers...

 

In July, the Supreme Court delivered its judgement in Harpur v Brazel. This case settled the long-awaited question of how to calculate holiday pay for part-year workers. Employers who engage casual workers or those who employ a workforce that only work for part of the year may now be questioning the impact this judgement will have on them.

 

The Percentage Method

One longstanding method employers have used for calculating holiday pay for workers with irregular hours is to take the number of hours actually worked and multiply them by 12.07%. This would previously give them the worker’s holiday entitlement for which the worker is paid at their normal hourly rate.

 

12.07% was commonly used because 5.6 weeks holiday is 12.07% of the hours worked by a full-time worker engaged to perform work for the entire year. Under this method, however, part-year and casual workers only receive a pro-rated entitlement to annual leave.

 

In Harpur v Brazel the Supreme Court unanimously rejected this method for calculating holiday pay, finding that it contradicted the Working Time Regulations 1998. The 12.07% method should therefore no longer be used to calculate holiday pay for those that do not work for a full calendar year.

 

The Working Time Regulations

Under the Working Time Regulations all workers are entitled to 5.6 weeks’ holiday, regardless of the regularity of their hours or whether they only work for part of the year.

 

The correct method for calculating holiday pay is to first calculate the worker’s average weekly pay in the 52 weeks immediately prior to the holiday period, ignoring any weeks for which the worker did not have any earnings. Their average weekly pay is then multiplied by 5.6 weeks, which is the total holiday pay to which they are entitled at that time.

 

This method may result in your casual workers earning proportionally more holiday pay than their full-time colleagues. For example, a worker engaged on a permanent contract, who only works three weeks out of the whole year, is still entitled to 5.6 weeks holiday, paid at their normal weekly rate. Regardless of the perceived unfairness of this, it will be the responsibility of the employer to ensure this is paid correctly.

 

Calculating Entitlement

The calculations become increasingly complicated if you want to express your workers’ holiday entitlement in days or hours. Calculating holiday entitlement for workers with regular hours is fairly straightforward. A full-time worker working five days a week is entitled to 28 days (5 days a week x 5.6 weeks = 28 days).

 

Likewise, a part-timer worker working two days each week is entitled to 11.2 days (2 days a week x 5.6 weeks = 11.2 days). Calculating holiday entitlement in days or hours for casual workers is much more challenging since you will not know ahead of time how many days or hours per week they will work.

 

One possible way to calculate a worker’s entitlement in days is to base it on their average hours worked over a previous representative period. For example, you may calculate that over the previous 12 weeks, your casual worker worked an average of 2.5 days per week.

 

If they wanted to take one day’s holiday they would therefore be taking 0.4 of a week (1 ÷ 2.5 = 0.4) and would attract 0.4 of a week’s pay. The remaining holiday entitlement for them to take would be 5.2 weeks (5.6 – 0.4 = 5.2). A similar calculation could be done to express the holiday entitlement in hours.

 

Performing these calculations every time a casual worker goes on leave may quickly become an administrative headache for employers. One way to reduce the complexity is to require workers to take their holiday in week-long increments.

 

Steps Employers Can Take

If your business engages part-year or casual workers there are steps you can take now to reduce your holiday pay liability. First, you may want to consider reducing your use of casual workers. Review how many casual workers you currently have on your books and the amount of work they do for you. Terminate contracts with workers who you no longer need to ensure they do not continue to sit on your books accruing holiday.

 

Another option is to engage casual workers more frequently throughout the year, to lower their average weekly pay. For example, a worker who works 15 hours one week will have a higher average pay than a worker who works 10 hours one week and five hours the next week.

 

Finally, you could engage casual workers on a separate contract each time you need them to perform work for you. You could then calculate their holiday entitlement and pay at the end of each period of work and they would not accrue holiday between periods of work.

 

However, if you regularly re-engage the worker on multiple contracts there is the risk that a tribunal may find that the arrangement is a sham, and that the worker is, in reality, engaged on a permanent contract. 

 

The issue is currently in the early stages of consultation, with the government potentially looking at ways the rules can be simplified for businesses but until additional legislation is enacted, employers will have to tread extremely carefully and will need to be able to demonstrate how they have calculated holiday pay in the event of any disagreements.

 

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