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Holiday pay entitlement change – zero hours time bomb?

Gareth Matthews, employment law partner - MLP Law

Changes to zero hours workers’ holiday pay entitlements are afoot, following a Supreme Court ruling that branded previous practices unlawful.

HR teams in businesses that use zero hours workers will need to establish a new approach to working out holiday pay entitlement as a matter of urgency. In 2022, there was an estimated 1.03 million people in the UK on zero hours contracts, up from 919,000 the previous year. Almost a quarter of the workers in the accommodation and food sectors were on zero hours contracts in the last year, while 20 per cent of workers in health and social care were working under zero hours obligations.

What are zero hours workers?
Zero hours contracts have been popular with businesses in many sectors but there are definitely areas where they are more commonplace, such as hospitality, health and social care, and logistics. Businesses with seasonal peaks and dips are also generally more likely to make use of casual labour on a zero hours commitment.

Zero hours workers have no set hours and businesses are under no obligation to offer them hours, making them an attractive solution to seasonal rush periods like Christmas or major sporting events which see pubs, bars, hotels and clubs heat up in terms of footfall. They are also well used by the care sector which relies on a fluid workforce to meet changing demands.

Almost a fifth of zero hours workers say that they have been working for their employer for five years or longer, implying that zero hours contracts are not purely a casual, seasonal work solution. For many people, a zero hours contract represents their full employment and it’s vital for their financial wellbeing that they are paid appropriately, and that they receive time off.

Despite not working pre-determined hours, zero hours workers are still entitled to holiday allowance under Working Time Regulations. Until now, many businesses have taken a pragmatic approach to this issue, adding 12.07% to wages to reflect a holiday pay allowance.

What’s changed?
A teacher who worked variable hours brought a case against her employer, arguing that she should be entitled to more holiday pay than she was receiving. Her employer was working out her holiday allowance simply by adding the usual 12.07% to her wage slip, leaving her out of pocket during school holidays.

Her case was that her holiday pay should be calculated using the number of hours worked and that this should only take into account the periods when she actually worked – that is to say, discounting school holidays when she did not work.

The Supreme Court agreed and ruled that the 12.07% practice is legally incorrect.

What does this mean?
For the teacher in question, her employer now needs to look at how much she worked over the last 52 weeks in which she worked – excluding the non-working weeks. This gives a weekly average, which should be multiplied by 5.6 (5.6 weeks being the minimum holiday amount, including all bank holidays) to give a holiday pay sum.

This is now the case for all employers using zero hours workers.

Employers need to work out how many hours were worked on average in the last 52 weeks where the person worked. This will provide a weekly average which should then be multiplied by 5.6 to give a holiday allowance. In many cases, this will give a greater sum that the 12.07% method.

Who will this impact?
This change will affect all businesses using zero hours workers but particularly those who use seasonal workers, due to the ruling that the average must be taken from weeks worked, not merely the past 12 months – which would have brought their average pay rate down.

For HR teams, it requires considerable paperwork to ensure that all zero hours workers are being paid fairly. Hours worked will need to be tracked properly, with at least a 12-month view on what has been done to work out the holiday pay.

Payroll will therefore also be affected, as the likelihood is that hours worked (and therefore holiday pay entitlements) will change on a regular basis.

With numbers of zero hours workers rising year on year, and with the current economic climate making casual labour more appealing to management, chances are that more and more HR teams will need to deal with this issue.

What are the next steps?
There are two main solutions for businesses using zero hours workers:

Firstly, you can approach the issue by ensuring that all seasonal workers have clearly defined fixed term contracts for each season worked. This takes away the ongoing agreement to offer work, removing a year-round relationship. You can then stipulate a holiday entitlement package in the seasonal contract, giving your business greater control over wage outlays.

This is not without risk, however. If you take this route, you are removing some job security from your zero hours workers and they may well seek alternative options. Workers may not return following the completion of their fixed term contract, so you must be confident that you can easily replace these workers before choosing this route, or risk being without vital labour in subsequent peak seasons.

A second option is to tackle this change proactively with zero hours workers, making sure they take annual leave throughout the year so they do not accrue huge payments. This approach requires you to treat zero hours workers more like a traditional employee, giving them paid time off during the year rather than a lump sum holiday entitlement once or twice a year. This will help cashflow, but impact workers’ availability.

Perhaps the most important next step is taking proper advice from an employment law expert. They will be able to look at your current worker profile and advise on what will be right both for your organisation and for the zero hours workers you employ.

Whatever you decide to do, time is of the essence as businesses are expected to abide by the new Supreme Court ruling immediately.

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