Medical practices are among tens of thousands of businesses in the UK which have wasted time on a now-obsolete way of calculating holiday pay entitlement.

Firms must revert to a former calculation from this April for part-time or irregular hours workers, scrapping the current ‘calendar method’ they had only just implemented last year [2023].

H-J Dobbie, head of HR Consultancy of UK Top 10 accountancy firm Azets, said:

"There was uproar in medical practices at a briefing seminar for them by us – all of them had switched to the calendar week method."

“Now, following a U-turn in employment regulations, they must revert to what they preferred using before – a calculation whereby holiday entitlement accrues at 12.07% of hours worked in each pay period.”

New provisions in The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 means a reversion to the system that holiday entitlement accrues at 12.07% of hours worked in each pay period.

This followed Government consultation after a Supreme Court decision in 2022 which turned holiday entitlement calculations on their head and left businesses reeling from the consequences. The outcome of the Harpur v Brazel case in July 2022 led to a sea change in the correct way to apply the regulations from the previous method of calculating holiday pay based on 12.07% of salary (‘the 12.07% method’), which was accepted as standard, to the so-called ‘calendar week method’.

The Department for Business, Energy and Industrial Strategy (BEIS) launched a consultation seeking views on proposals to pro-rata holiday entitlement for part-year and irregular hours workers based on the annual hours they work.

Proposals at the time leaned towards the holiday entitlement calculation returning to the 12.07% formula, albeit with some changes, which led to common belief that the law had created unintended anomalies in need of rectification and simplification.

H-J said: “Companies that changed to the new system will have wasted hundreds of hours getting to grips with the calendar week method, which proved to be a ridiculous scenario and a really big headache for payroll teams."

“Ultimately, it is good news as the new rules are clear and fair, but not great for those businesses that made a change and have now got to change again. Companies who changed system are absolutely exasperated at this complete U-turn."

“Payroll software was unable to cope with the calendar week system and thankfully, because of the uncertainty and the fact it was out for consultation so soon after that court case ruling, I don’t think anybody invested the time or the money in actually developing new software."

“It would be interesting to find out how many companies made that switch and now will have to switch back – how much it will cost in terms of systems and human hours, and whether there will be any chance of recompense."

“It is coming in, subject to Parliamentary approval, for holiday years from 1 April 2024 so theoretically anybody’s holiday year that starts in January won’t be hit until 2025. The other good news is that rolled up holiday pay will be deemed allowable again for those that want to be paid for any accrued holiday rather than take it, as long as the holiday pay is shown separately on the payslip."

“It removes the farcical situation where people had to be given a shift they wouldn’t in any case work just to book time off and be paid for holiday supposedly requested and taken.”

The Harpur v Brazel case involved a visiting music teacher employed by the Harpur Trust at Bedford Girls’ School who took the trust to an employment tribunal on a deduction from wages claim over her holiday pay and the case ended up at the Supreme Court.

The court ruled in her favour and held that the 12.07% method meant that if Ms Brazel worked fewer hours in any term her accrued holiday would amount to less than 5.6 weeks a year, which was a breach of the Working Time Regulations 1998 (WTR).

The court judged that every worker, including part-year workers, should receive at least 5.6 weeks’ paid holiday for each year they remain engaged on a permanent contract, and this should be calculated on the calendar week method, not on a percentage of the hours worked.

H-J added: “I think most companies will be as keen as possible to get back to the 12.07% method because it is so much simpler to calculate, although it should be noted that the 52-week rule for average pay calculations is not changing."

“In terms of human hours, if you know that your employees worked 100 hours over the last month, 12.07% of that is a very easy calculation, round it up to the nearest hour and there is their holiday entitlement. Otherwise, you have to go all the way back, calculating average weekly hours over 52 weeks – and that was only weeks when work was carried out – so you potentially go back further, possibly up to 104 weeks.”

The calendar week system caused controversy when it was introduced, not least because of situations such as the example of one permanent employee at a school who worked three weeks a year (as an exam invigilator) but who was still entitled to 5.6 weeks’ holiday pay – around double her salary in holiday pay.

The HR Consultancy at Azets, the UK’s specialist business advisor to SMEs, was swamped by queries from concerned businesses worried about whether to switch systems.

H-J’s pragmatic advice then was for companies to sit tight on the 12.07% method - if they accepted the small risk of this being challenge - and see what developed after the consultation. This proved to be correct.