Holiday pay calculation changes

January 31st 2020

In April 2020, an important change will be made to the holiday pay reference period which is used to calculate holiday pay entitlement for employees and workers. As an employer, what do you need to know? Head of Payroll Joanne Gibson finds out.

On 6th April 2020 the holiday pay reference period will be extended from 12 to 52 weeks. Holiday pay is calculated using only those weeks that have actually been worked; annual leave and sickness are excluded.

Until now, average weekly pay for holiday pay purposes has been calculated using a 12 week reference period. Only those weeks where monies have actually been earned are counted; weeks of annual leave, sickness absence or nil earnings are excluded from the calculation as are those where an individual has been in receipt of statutory payments. This means that you have to count backwards until the individual has 12 successful weeks of earnings.

New law
In early 2019, the government stated that this 12 week reference period penalised those who work irregular and fluctuating weekly hours because they would invariably receive less holiday pay after quieter times. Consequently, it passed the Employment Rights (Employment Particulars and Paid Annual Leave) Regulations 2018 which comes into force on 6 April 2020. These Regulations increase the holiday pay reference period from 12 to 52 weeks.

What does this mean?
From 6 April 2020, holiday pay will need to be calculated on average hours worked over 52 weeks.

As with the old 12 week reference period, any weeks not worked are excluded from the calculation. Where there is fewer than 52 weeks’ of pay information, you must include as many whole weeks of pay information as possible.
The regulations state that there is no need to refer back any further than 104 weeks to find relevant weeks of pay. You will use the number of weeks worked within that 104-week period, even if it is less than 52.

Do not leave changes to the calculation of the new pay reference period until the last minute. Start preparing now and ensure you are recording all overtime worked.

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