Is Your Payroll Ready For The Holiday Pay Reference Period Change?

holiday pay 2020

Calculating holiday pay for workers who don’t have fixed hours or who have variable pay has posed a challenge for quite a while now. But in April next year, new legislation will require payroll to adjust the way holiday pay is calculated to try to address the problem.

What’s the current situation?

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At the moment, the payroll calculation is made based on the 12 weeks that were worked before the holiday leave period. The current pay reference period disregards any weeks of statutory payments, nil earnings and annual leave. That means in practice employers have to ‘count’ backwards until they have 12 ‘successful’ weeks of earnings.

But this approach has caused problems for sectors that require staff to work patterns that include overtime, irregular hours and shifts that incur premiums and has sometimes resulted in unintentional non-compliance.

A European Court of Justice ruling requires holiday pay to reflect contractual and regular patterns of overtime, commission payments and pay allowances.  In practice this means pay fluctuations in the weeks before the period of leave could make holiday pay higher or lower depending on how much work has been undertaken in what is a relatively short period of time prior to the leave. There might be a quieter few months during the year when in workload terms it would make sense from both the employee’s and the company’s perspective to take time off. Yet the fact that the employee might have lower earnings in some of that period could mean, understandably, they’re reluctant to take a holiday.

What will be required of businesses from April?

holiday pay 2020 April

The upcoming change to the holiday reference period originated from the Taylor Review of Modern Working Practices. It became part of the Government’s Good Work plan that was unveiled at the end of 2018. The resulting Employment Rights (Employment Particulars and Paid Annual Leave) (Amendment) Regulations 2018 (SI 2018/1378) are now bringing in a change to give these types of workers what’s intended to be a fairer way to have their holiday pay calculated.

From 6th April 2020, the reference period will change to 52 weeks. If the worker’s been employed for less than 52 weeks in total, holiday pay will be calculated on the total number of weeks’ employment. It’s expected this method of calculation will give employees more flexibility over when they choose to take holiday, and will ensure they are always able to get their full holiday pay entitlement.

What issues might arise as a result?

holiday pay 2020 problems

Inevitably, the change to the legislation has raised questions for HR and payroll teams to consider. When it comes to holiday pay, some employers begin their year on 1st January. So it may well be that some will opt to make the change sooner to stay in line with their current holiday year rather than wait until April.

There has also been some lack of clarity over what constitutes a year. Initially there was confusion about whether it would be a calendar year reference period even if the employee hadn’t been paid for them all (i.e. they were not all ‘successful’ weeks working). The guidance seems to confirm that, like the 12 week period, it needs to be 52 weeks prior to the leave where workers are paid so that might cover a period going back beyond 52 weeks. However, the regulations set a limit of 104 weeks, so employers will not need to look back past that point.

Our payroll software and outsourced payroll solutions can help you

holiday pay 2020 how CPS can help

Keeping track of these types of legislation changes (plus subsequent applicable case law in HR and payroll) then making sure your business is complying can be complex and time consuming.

Our HR and payroll software solutions are designed to keep your business compliant with all aspects of payroll regulations. Use our payroll bureau and fully managed payroll services and you will have the reassurance of knowing your payroll is being taken care of. If you’re looking for ways to remove much of the burden around the administration of legislation changes, please do contact us to find out more.