Changes to holiday pay from 6th April 2020

As part of the measures proposed in the Good Work Plan to improve transparency between employers and workers, the Government is changing the holiday pay reference period for calculating an average week’s pay for workers with variable pay.

That could either be those who work normal hours but remuneration is tied to the amount or the time the work is done, or because the worker doesn’t have normal working hours, including seasonal and casual workers.

What is changing?

From 6th April 2020, where a worker has been with their employer for at least 52 weeks, the reference period will increase from 12 weeks to 52 weeks. Where a worker has been with their employer for less than 52 weeks, the reference period will be the number of weeks for which the worker has been employed.

These changes better reflect the nature of casual and zero hours work and will reduce the incentive for employers annual leave before busy times, or discourage them from taking leave just after busy periods.

Example of how the new 52 week reference period will work

Kate works in a large retail store, working on average 35 hours per week. May, June and July are quieter months for the store and during these times, Kate typically work 25 hours per week.

Under the current 12 week reference period for holiday pay, if Kate takes holiday in August, immediately after this quieter time, her holiday pay will reflect her 25 hour working week. This means that she will receive less holiday pay compared to busier times of year.

Once the reference period is extended to 52 weeks, Kate’s holiday would reflect her average hours for the entire year. This is a fairer approach which better reflects her working hours over the year.

What to consider ahead of 6th April 2020

Employers should ensure they keep records of employee pay for the 52 weeks prior to 6th April.

Employers should also consider when to make the change. For the purposes of holiday pay, many firms start their year on 1st January. If that is the case, you would need to decide whether to change the way you calculate holiday pay on 6th April, or at the start of the holiday year.

Christmas means high levels of overtime in some sectors, which could have an impact on holiday if you switch to the new system in January. It could also mean that people who work the same hours receive different holiday pay simply because of the dates they take leave.

If your financial year ends after the 6th April, the value of accrued but untaken holiday pay will increase, so you might want to limit how much holiday can be carried forward.

If you are unsure how to calculate holiday entitlement, take a look at GOV.UK’s Holiday Entitlement Calculator.

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