What does the law require?

Under UK legislation:

• The Working Time Regulations 1998 (WTR) set out employees’ statutory holiday entitlement.
• Case law (including Bear Scotland v Fulton and Lock v British Gas) established that holiday pay must reflect “normal remuneration”, not just basic pay.
• For workers with variable pay, employers must use a 52-week reference period (introduced under the Employment Rights (Employment Particulars and Paid Annual Leave) (Amendment) Regulations 2018).

In practice, this means:

·      Holiday pay should be based on the average pay received over the last 52 paid weeks, ignoring weeks where no remuneration was received and going back up to 104 weeks where necessary.

While the legal framework is relatively well established, applying it consistently in practice can be more challenging.

Common issues we see in practice

In our experience, many payroll setups fall down in one or more of the following four areas:

1. Including the wrong pay elements

• Overtime, commission, and allowances are sometimes excluded incorrectly
• Or applied inconsistently across different employees or pay periods

2. Incorrect use of the 52-week average

• Including weeks with no pay (which should be excluded)
• Using 12-week or monthly averages instead

3. Lack of audit trail

• No clear record of how holiday pay has been calculated
• Difficult to evidence compliance if challenged

4. Disconnection between bookings and payroll

• Holiday bookings recorded in one place
• Payroll calculations handled separately
• No clear reconciliation between the two

Why this matters

Getting holiday pay wrong can lead to:

• Potential backdated claims (typically up to 2 years under current legislation)
• Employee disputes
• Reputational risk
• Potential employment tribunal claims or legal challenge

In addition, the recent establishment of the Fair Work Agency (FWA) has increased the focus on employer compliance and record keeping. The FWA has powers to pursue enforcement action, including potential criminal proceedings for serious failures.  This includes requirements to maintain adequate holiday pay and annual leave records for up to six years — making it even more important that calculations are not only correct, but clearly documented and auditable.

Even where the financial exposure is modest, the lack of clarity can create ongoing operational issues.

What does “good” look like?

A compliant and robust approach should:

• Clearly distinguish between worked hours and non-worked periods
• Apply a consistent 52-week averaging method
• Include all relevant elements of normal remuneration
• Maintain a clear, auditable calculation trail
• Align holiday bookings directly with payroll outputs

A practical approach

We’ve found the most effective way to manage this is to:

1. Map out how holiday pay is currently calculated
2. Identify any gaps or inconsistencies
3. Apply a structured calculation approach based on actual worked data
4. Introduce simple controls to ensure ongoing accuracy

Need a sense-check?

If you’re unsure whether your current setup is compliant, a short review can usually highlight:

• whether your approach aligns with legislation
• where risks may exist
• and how easily these can be resolved

If helpful, we’re happy to carry out a practical review of your current holiday pay setup and provide clear, actionable feedback. Just email kath@kaizenconsulting.co.uk or call to speak to Kath on 01482 772261

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