How do I calculate annual leave for zero hours employees?

+Despite todays (20th July 2022) ruling, there is still a huge amount of confusion about how to calculate annual leave entitlement and pay for variable hours workers and those who work for part of a year.

Until 2019, most employers used a percentage method to calculate annual leave entitlement based on actual hours worked. The percentage applied was usually 12.07% as this is based on the statutory minimum 5.6 weeks of leave that a full-time employee is entitled to. Where employers gave full time employees more annual leave, they increased the percentage accordingly for flexible hour employees.

However, in 2019, a case was taken to the employment tribunal which challenged the basis of the calculation. This case then went to the appeal and now The Supreme Court have released their ruling.

Organisations such as ACAS have rewritten their guidance to incorporate the 2019 findings and based on today’s ruling some further tweaks will be needed, but in summary here is what we think the implications are for businesses:

  • Zero hours employees, flexible hours employees and term time only workers on permanent contracts are all impacted by this ruling.
  • It is unclear whether seasonal workers, agency workers or those on fixed term contracts of less than a year are impacted and if not, how we are supposed to calculate their annual leave entitlement.
  • As there is no provision for the pro-ratering of annual leave entitlement in the legislation, all permanent workers are entitled to 5.6 weeks of annual leave per year including public and bank holidays.
  • Therefore, regardless of how many weeks permanent employees work within the holiday year, they are now entitled to at least 5.6 weeks of annual leave and possibly more.
  • Their holiday pay is calculated based on the average weekly pay received in the 52 weeks immediately prior to taking their time off.
  • If they have had some weeks with no work and therefore no pay is received these are excluded and you go back to include the last 52 weeks in which they have done some work.
  • The Supreme Court has said that it is not discriminatory to treat these employees differently to their part time full year colleagues – even when they may work the same number of hours across the year.
  • The ruling also states that while there may be some people better off and some people worse off by using the calendar weeks method, it wasn’t significant enough to warrant rewriting the legislation.
  • This is likely to be challenged by part time employees who are being treated less favourably than their flexible hours colleagues.
  • This ruling may lead to claims for holiday back pay and it is difficult to know how far back people will be able to claim for.
  • Contracts of employment will need to be updated and so will employee handbooks.
  • HR Software and time and attendance systems will also need to be reprogrammed to account for the changes.
  • This is not a change in legislation, but a change through case law. It is possible that legislation may follow to provide more clarity, but at the moment, we are stuck between the Working Time Directive, the Working Time Regulations, The Part-Time Workers Regulations and probably the Equality Act as well as certain groups are treated better or worse than other groups of workers.

As an HR expert with over 25 years of experience working with businesses across all sectors and of all sizes, I have unanswered questions and thousands of employers will have too.

The only way I think we are going to get answers to some of these questions will be in the employment tribunal and that is a devastating position for employees and employers alike.

My daughter has worked with us on and off for a number of years. She comes back during holidays and when I have a project or require some art work she helps out and gets paid for that work. She has a permanent zero hours contract of employment.

In addition to her hourly rate, she was getting 12.07% in holiday pay for every hour she worked. As she does not work any set patterns, she in effect takes the holiday in the month in which she has earned it and gets paid for the leave when she takes it.

Under the rules ‘clarified’ today, I have no idea how much holiday pay she is entitled to.

Let me explain:

She worked the whole of last week – 35 hours.

She is now off for the next 2 weeks on pre booked holiday with her friends.

She will then come back and work through until when she goes to Uni.

If she is earning £10 an hour, then under the percentage calculation method, she would have earned £350 in salary and £42.25 in holiday pay. At the end of July she would receive a payment of £392.25.

However, it appears that now Dania is entitled to 5.6 weeks of paid leave based on the average number of hours she works in the 52 weeks before she takes the leave.

As she only did one week of 35 hours, her average is 35 hours.

Therefore, she would need to be paid for her two weeks of leave at £350 per week i.e. £700.

At the end of our annual leave year in December, she would need to take and be paid for a further 3.6 weeks.

Let’s assume she goes away from 7th December for 3.6 weeks.

If we calculate 52 weeks back from there we are at December of last year.

Well she did a week of work at Christmas last year so that week is included in her calculation. As she worked 35 hours a week at £10 an hour, her weekly average pay is still £350 per week.

Therefore for the 3.6 weeks she takes off at the end of December (to complete her 5.6 week entitlement), she will be paid £1260.

So from 11th July – 16th September she has worked for 8 weeks and earned £2800.

Under the Supreme Court Ruling, she is entitled to 5.6 weeks of pay at £1960.

Under the percentage method, Dania would have earned £337.96.

A full time colleague working 35 hours a week would have accrued 5.5 days for the same period of time.

Someone please tell me I have misunderstood this!!!