UK’s ‘Good Work Plan’: Tackling the complexities of holiday pay

The UK government’s ‘Good Work Plan’  proposal, published in December 2018, lays out a number of key changes due to take place in the field of both employment law and payroll.

These proposals came off the back off a report written by Matthew Taylor in July 2017 entitled “Good Work: The Taylor Review of Modern Working Practices”. Some of these changes, such as the right to payslips for all workers, are due to take effect from April 2019.

But others will not be introduced until April 2020. One of these scheduled changes involves altering the reference period for calculating holiday pay from 12 weeks (as per section 221-224 of the Employment Rights Act 1996 ) to 52 weeks for variably-paid workers.

The principle behind the move is to ensure neither workers nor employees suffer any financial detriment as a result of taking annual leave. A lot of case law has focused heavily on this topic over recent years, including Bear Scotland v Fulton [2015], Lock v British Gas [2014] and Dudley Metropolitan Borough Council v Willetts [2017]. 

The idea is that a 52-week reference period will capture more of a worker’s true average working pattern than a 12-week period would. This situation is particularly true of workers who do more hours in summer and less in winter, and workers whose pay varies depending on the type of shifts they undertake.

The UK government has to date not provided any further clarification of the logistical considerations of the proposal. But from both an employer and payroll software provider’s perspective, there are a number of key questions that need to be answered.

The first is an exact definition of what 52 weeks consists as well as what the reference period for that 52 weeks is. For example, could an employer consider the reference period to be either a 365 or 366-day calendar year that comprised 52 weeks or 52.25 weeks as long as their calculation was consistent for all staff?

Payroll software often calculates holiday pay based on a month or 13-week average, as opposed to a 12-week average. So could the same level of flexibility be applied here?

It would certainly make more sense for the reference period to be a “rolling” 52 weeks as opposed to a set period (such as starting from a worker’s first day of employment) as, in the former instance, it would reflect the most recent changes to hours and pay. It would also offer a clearer snapshot of the average than relying on data that is potentially up to 52 weeks old.

Further complex questions

Another consideration is the calculation period required for workers with less than 52 weeks’ service. The new legislation states that for them, the number of weeks they have been in employment should be used as the basis on which to calculate average holiday pay.

This situation is already in line with the “longer-average” concept that the legislation enshrines. But from a payroll operations perspective, it would be much easier and more logical to default back to a 12-week average if the worker had undertaken less than 52 weeks’ service.

As a side note, there is also the issue of what will be required in relation to non-guaranteed-hours staff, who work as and when for less than 52 weeks in any 52-week period.

According to the law, employers would have to find 52 weeks of actual work performed, but it would not be possible to use any of those weeks if they fall more than 104 weeks before the calculation date. This means in principle that, if an individual works less than 52 weeks over the course of the year, the smaller amount will be applied on a pro-rata basis based on how many weeks were worked. 

Currently, if any weeks of sickness fall within the 12-week relevant reference period for calculating holiday pay, they must be discounted and the reference period pushed back until a full 12-worked weeks are used.

Will the same apply for the 52-week reference period as well? The UK government would be wise to take this invaluable opportunity to remind employers that weeks of sickness should be discounted when calculating the average weekly wage for holiday pay purposes. Offering more education in this area would make sense as many already struggle with the complexities of applying a 12-week average and understanding how it should work.

But there are also contractual obligations to take into consideration. To make the process smoother, employers may wish to start the 52-week average process earlier so that it coincides with the holiday year. They may also need to change policies or the wording of their contracts, handbooks and holiday policies in advance of the shift.

Anyway, hopefully all of these questions will be answered sooner rather than later in further detailed government guidance. Providing it in a timely fashion would not only enable payroll providers to ensure their software is equipped with the relevant algorithms so that holiday pay for variable staff can be calculated in line with the Good Work Plan. It would also give employers enough time to adjust their calculation methods and contracts well in advance of the new legislation coming into force.

Richmal Price

Richmal Price is a payroll expert at global employment law consultancy, Peninsula.  With 12 years’ experience in the payroll field, she has worked in both internal and bureau environments and currently manages the firm’s payroll advice team. As well as benefitting from technical knowledge of manual payroll calculations and having an understanding of HMRC legislation, her speciality is the crossover between payroll and employment law.