Earlier this year, the Supreme Court confirmed that holiday pay for part-year workers needs to be calculated on the basis that
i) they are entitled to 5.6 weeks' statutory paid annual leave per year of employment (disregarding any additional contractual entitlement) and this should not be pro-rated to reflect the % of the holiday year which they actually worked and
ii) their holiday pay needs to be calculated using the 'week's pay' formulae set out in the Employment Rights Act 1996 (ERA). Paying a worker an additional 12.07% of worked hours (which used to be recommended by ACAS for intermittent and part-year workers) is likely to result in underpayments of holiday pay (and therefore potential liability).
The reason is that, under the Working Time Regulations (WTR), paid holiday entitlement is a proportion of the holiday year for which the worker has been employed, not a proportion of that year that they have actually worked. The fewer weeks they work per year (while remaining employed when not working), the greater the difference between what they receive under the 12.07% method and what they should receive under the WTR and ERA.
The ERA formulae require employers to use a reference period of 52 weeks to calculate a week's pay, disregarding any weeks in which the worker received no pay. This means that a worker who works full-time, but only for a few weeks each year, would be entitled to 5.6 weeks of holiday, paid at (in simple terms) the rate they receive when actually working.
This can significantly increase the costs of hiring casual or part-year workers and many employers will be facing potential liability for historic underpayments. It also creates huge headaches for employers tasked with calculating holiday pay for intermittent and part-year workers. In our experience, payroll software is often not well-equipped to calculate entitlement for these workers correctly.
There isn't a one-size-fits-all solution to this problem. Employers will need to assess their risk exposure carefully and devise a strategy accordingly.
A key issue to consider is whether it makes sense to keep a 'bank' of casual workers continuously engaged but working only intermittently. Some employers operate a system where the contracts of casual workers who do not work for a specified number of weeks are terminated and the worker then re-engaged if they ask to work another shift. This system can avoid build-up of holiday entitlement but needs to be operated carefully to avoid claims for unfair dismissal.
On the other hand, if it is necessary to keep some intermittent workers employed while not working, employers will need to update their holiday pay calculations to reflect what is now settled law.