How to calculate holiday pay for workers on zero-hour contracts

Are you bashing your head against the wall trying to figure out entitlements for those on zero-hour contracts?

If so, you’re not alone. Zero-hour workers won’t work the same amount of hours each week – in fact, some weeks they won’t work at all – which complicates matters when it comes to figuring out holiday pay and makes it frustratingly easy for employers to get it wrong.

If the legalities surrounding zero-hour contracts make your head spin, download our free Definitive Guide to Zero-Hour Contracts to discover what the law says, the rights workers are entitled to, and our top tips when engaging individuals on this basis.

Struggling to work out entitlements for workers or employees with variable hours?

In this article, we help you to make sense of it all, from how annual leave and holiday pay is calculated to the rules surrounding payments in lieu.

How do I calculate an employee’s annual leave allowance?

The law gives workers and employees the right to at least 5.6 weeks (28 days) of paid annual leave per year. This can include bank holidays, or you may wish to treat bank holidays as separate.

If an employee works part-time, they are entitled to a pro-rated entitlement. Part-time leave is calculated by multiplying the number of days worked per week by 5.6. For example, if an employee works three-day weeks, they will be entitled to 16.8 (i.e. 5.6 x 3) days of paid annual leave. Of course, if you offer more than 5.6 weeks’ annual leave each year, the full amount should be pro-rated.

As soon as someone starts a new job, they begin to accrue leave. If they begin a job mid-way through the year, they will have the right to only a part of their allowance. They will accrue one-twelfth of their leave in each month.

Where it gets complicated…

The rules above don’t translate easily for those on zero-hour contracts who work a different number of hours each week and a recent court decision has muddied the waters even further. The verdict has established that all zero-hour workers are entitled to 5.6 weeks’ annual leave per year.

The challenge for employers will be establishing what constitutes a week, especially for those people who work very sporadically. Our specialist Employment Law advisers can help with this.

Once you have worked out the holiday entitlement for a zero-hour worker, you need to calculate what to pay them. A week’s pay in this case is established by working out the average weekly pay for the previous 12 weeks they have worked.

Umbrella contract or separate assignments?

You also need to think about how assignments are structured.

  • If an employee or worker engaged on a zero-hour contract is on an umbrella contract, they will accrue leave during the entire duration of the contract. This is irrespective of whether or not they are working.
  • However, if an employee or worker is on separate and severable assignments, their annual leave entitlement will only accrue while they are working.

How is holiday pay calculated for workers with variable hours?

Holiday pay is an issue that has long been causing headaches for employers.

The general rule is that for workers with fixed working hours, holiday pay amounts to their weekly normal remuneration. A recent court ruling has suggested that voluntary overtime should also be factored into holiday pay calculations if payment for such work is “sufficiently regular and settled” for it to amount to normal remuneration.

For employees or workers whose hours differ from week to week, holiday pay will be calculated on the average pay earned in the past 12 weeks. Of course, there may be a week where they didn’t work at all; if this is the case, you will need to count back a week to ensure that the rate is based on the most recent 12 weeks in which they were paid.

What are the rules regarding payment in lieu of leave?

You cannot pay a worker pay or employee in lieu of holidays. The only exception is upon termination of the employment relationship.

At the end of an assignment, you must pay the worker in lieu of any accrued but untaken holiday. If there is an umbrella contract, you can only pay a worker or employee in lieu at the end of the contract, not at any times when they are simply not working, as the contract is still in existence.

Need a helping hand?

Don’t forget to download our free Definitive Guide to Zero-Hour Contacts for answers to some frequently asked questions about these types of contracts, plus more information on the law, government policy and best practice. We also share some expert tips and highlight some of the common mistakes employers make which may leave you exposed to an Employment Tribunal.

Want to speak to a professional for guidance and clarification on your specific situation? Our qualified Employment Law specialists are available to take your call on 0345 226 8393.