Variable Holiday Pay: Here's How It's Calculated (100% HMRC-Compliant)

Need help getting your head around variable holiday pay and how it's calculated?

With laws changing over the past few years and a lot of outdated information out there, holiday pay for variable hours workers can get confusing.

So, below we've laid out exactly what you need to know to stay on the right side of HMRC compliance...

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What is variable holiday pay? How does it work?

Variable holiday pay is the practice of calculating holiday pay for workers whose hours (and therefore pay) is not fixed.

When we talk about 'variable hours employees', we mean those who don't have a regular working pattern and are not guaranteed a fixed number of hours by their employer - like casual workers or those on zero-hours contracts. 

Unlike shift workers, for example, those on variable hours will tend to have a less predictable working pattern...

This could mean working weekends, night shifts, holiday time etc.

Whilst employees will get paid holiday pay based on their daily or hourly rate, variable holiday pay needs to be calculated slightly differently, since these workers have irregular hours (which we'll get to later below👇)

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Eligibility for variable holiday pay

Near enough all workers in the UK are entitled to 5.6 weeks’ paid holiday per year.

This applies to all types of worker, whether they're full-time employees or on variable-hours contracts.

In the UK, eligibility for variable holiday pay is based on a few different factors:

Employment status

To be eligible for holiday pay, a worker must be classified as either an employee or a worker (this includes individuals on permanent contracts, temporary contracts, or those with irregular working arrangements like zero-hour contracts).

Accrual of holiday entitlement

Workers accrue holiday entitlement as they work (usually 5.6 weeks per year). This can include both the basic leave entitlement and any public holidays that are part of the package - although entitlement to public holidays will generally be dictated in a worker's contract.

Irregular or variable hours

Variable holiday pay is primarily intended for workers with irregular or variable working hours. This includes workers whose hours and pay vary from week to week or month to month.

Note: 5.6 weeks is the statutory holiday entitlement - this is the legal minimum that your employees are entitled to. You can always offer additional holiday on top if this if you want to make a more attractive benefits package.

 If you still need to double check anything, you can use HMRC's holiday entitlement calculator 

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How to calculate variable holiday pay

For employees working more regular hours, holiday pay calculations are usually based on their basic daily or hourly rate.

However, for those on variable hours, you'll have to calculate this slightly differently - using a 52-week reference period to get their average weekly rate. 

Step 1: Determine the 52-week reference period

First off, you'll need to get your 52-week reference period - which is just the past 52 weeks an employee has worked/earned any pay whatsoever.

If there were weeks in which they did not work at all, you simply excluded these from the reference period.

This means that sometimes you'll need to go a little further back than 52 weeks from the date the employee is taking leave... just be sure not to go back further than 104 weeks.

Step 2: Add up pay

The next step is to add up the worker's total earnings over this 52 week period.

Just sum up the pay for each week worked to get your total.

Step 3: Calculate the average weekly pay

Once you've got your total earnings, you divide this number by 52.

This will give you the worker's average weekly pay - which will be the weekly rate of holiday pay.

Step 4: Calculate variable holiday pay

Multiply the average weekly pay by the number of weeks of holiday the employee is taking. This will give you their variable holiday pay.

So if a worker earns £14,000 over a 52 week period... 

£14,000 / 52 = £269

This means the variable holiday pay would be £269 for 1 week of leave.

Variable holiday pay formula: Total earning over 52-week reference period / 52 = pay for 1 week of holiday (average weekly pay)

What if you need to go back further than 52 weeks?

 Since the 52-week reference period can only include weeks in which a worker was actually paid for, this means you might need to go back a little further if there are weeks you have to skip over.

How far you can go back is now capped at 104 weeks. If you hit the cap and still don't have 52 weeks to work with, just base your calculations on the weeks you have data for.

If a worker has only worked for 25 weeks, for example, just use as many paid weeks as you can to calculate holiday pay.

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Variable hours workers' other rights 

In addition to holiday pay entitlement, here are just some of the other rights that a variable hours worker has:

National Minimum Wage (NMW): Variable hour workers are entitled to be paid at least the National Minimum Wage (NMW) or the National Living Wage (NLW) if they are 23 years old or over.

Statutory Sick Pay (SSP): If eligible, variable hour workers are entitled to receive statutory sick pay when they are unable to work due to illness. To qualify, they need to meet certain criteria, including earning a minimum amount (£123 per week).

Right to request flexible working: While variable hour workers already have flexibility in their work arrangements, they still have the right to request flexible working arrangements from their employer, which may include changes to their hours or location of work.

Right to a written contract: Employers are legally required to provide a written employment contract to variable hour workers, which outlines terms and conditions of employment, including pay, working hours, and other relevant details.

Pension auto-enrolment: If eligible, variable hour workers should be automatically enrolled in a workplace pension scheme, and their employer may be required to make contributions to the pension fund.

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Here are the need-to-know changes to the employment laws around holiday pay

The 52-week reference period

Back in 2020, the holiday pay reference period was extended from 12 weeks to 52.

This was to make sure someone's working patterns are more fairly represented in holiday pay calculations.

Harpur Trust v Brazel

Harpur Trust v Brazel is a legal case in the UK that specifically addresses the calculation of holiday pay for certain types of workers, specifically those with irregular working hours or part-time workers.

This case has implications for UK employers, particularly if you employ individuals with irregular working patterns.

As a result of this case, the 12.07% method is now strictly unlawful.

All workers now get at least 5.6 weeks’ holiday pay - regardless of the time spent working.

Whilst this ruling may be amended in the future to better accommodate edge cases, the Harpur Trust v Brazel judgment remains binding law and a failure to correctly pay holiday pay could mean facing claims for unlawful deduction of wages.

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Holiday pay for variable hours FAQ

What are the new rules on holiday pay?

Everyone is entitled to 5.6 weeks minimum holiday allowance - no matter what contract type of shift patterns they work.

If a worker doesn't have regular working hours, you can add up their pay over the past 52 weeks worked and divide by 52 to calculate what a week of holiday is worth. 

Annual leave entitlement for variable hour workers

All workers (including those variable hours employees, casual or zero-hour workers) get 5.6 weeks of paid holiday as a statutory minimum.

How does variable holiday pay work?

To calculate the value of a week's holiday,  divide the total earnings over the past 52 weeks that have been worked by 52.

When did rolled-up holiday pay become illegal in the UK?

Rolled-up holiday pay was made illegal in 2006. It is now unlawful to use this method.

Do variable hours workers get bank holidays off?

Whether or not employees have to work bank holidays will be largely depend on what you choose to outline in their contract... and so is up to your discretion. 

What are contractual holiday entitlements? How do they differ from statutory entitlements?

Contractual holiday entitlements is the amount of holiday you choose to give to your employees in addition to the legal requirements. 

Statutory entitlement, on the other hand, is the holiday all employees are entitled to by law.

Can I still use 12.07 to calculate holiday pay?

No, this is now unlawful. Instead you should always use the 52-week calculation for holiday pay.