Importance of a Written Contract

The starting point in any holiday calculation is the contract of employment. Ideally the contract will give clear guidance about how annual leave entitlement will accrue. A thorough contract will also state how much an employee will earn and outline all other benefits that they are entitled to receive. Written contracts of employment are also important to protect business interests and offer clarity to both parties in case of a dispute. Since 6 April 2020, it has been a statutory obligation for employers to provide employees with a written statement of employment particulars (a “Section 1 statement”) from day 1 of their employment. In the event of an employment tribunal, if a business is found to have not issued a contract to an employee, then it could be fined up to a month’s pay.

Legal Overview - the Working Time Regulations (WTR):

Most workers, including casual and atypical workers, have a right to a minimum of 5.6 weeks' paid annual leave under the WTR 1998. The Regulations do not define what is meant by a week's leave, however, the established view is that a week's leave involves a worker being away from work for a week. How this applies to a worker with no “normal” working hours can be difficult to establish.

Difficulties with calculating a day / week:

Where a casual worker takes annual leave, it can be difficult to identify how many hours of accrued leave they need to use to take a day's leave.

If a worker does not have normal working hours, their holiday pay is calculated based on their average weekly remuneration in the 52 weeks before the date of their holiday (excluding any weeks in which no remuneration was payable). Care should be taken when the worker does have normal working hours during a relevant assignment and their remuneration includes variable elements such as guaranteed overtime and commission, since these will have to be reflected in holiday pay,

Methods to calculate annual leave entitlement:

During the first year of employment, special rules set out in regulation 15A of the WTR apply to the accrual of leave, which means that holiday entitlement is deemed to accrue at the rate of 1/12th of a full year's entitlement (5.6 weeks) at the beginning of each month. Subject to this restriction, casual workers are entitled to take holiday during their employment and to be paid in respect of unused holiday on termination of employment

Government guidance states that "in practice, if needed, employers may wish to calculate average days or hours worked each week based on a representative reference period, although the Regulations do not expressly provide for this". The important thing, it says, is to ensure that each worker receives at least 5.6 weeks' annual leave per year.

As it is not always possible to calculate the correct proportion of statutory holiday for a casual worker, particularly in the first year of employment, it may be necessary to reach a rough-and-ready analysis of the worker's statutory holiday entitlement as being 12.07% of the hours or days worked. Under this method, all hours worked are taken into account, including overtime (whether compulsory or otherwise).

Why the 12.07% figure?

Workers are entitled to 5.6 weeks' paid holiday each year, under regulations 13 and 13A of the Working Time Regulations 1998 (SI 1998/1833). A year is 52 weeks. Subtracting 5.6 weeks' holiday leaves 46.4 working weeks in the year. 5.6 is 12.07% of 46.4, so this figure represents holiday expressed as a percentage of working time.

Annual leave entitlement and holiday pay can be a complex area, and for any further questions please get in touch with us.