A Brief History of Holiday Pay Calculations
Stephanie Pote · Posted on: December 18th 2025 · read
In the beginning:
On 1 October 1998, the Working Time Regulations 1998 were enacted, originating from the EU Working Time Directive.
These provided an entitlement of four weeks’ annual leave inclusive of national holidays; from 1 April 2009 this was increased in the UK to four weeks in addition to public holidays i.e. 5.6 weeks.
It was understood that there was a general principle of pro rating these entitlements for anyone working anything other than full time, including part time days during the week and also part year workers.
Casual / zero hours workers were permitted to be paid “rolled up holiday pay”. This means that for every hour worked, an employee accrues 12.07% of that hour as paid holiday entitlement.
Why 12.07%?? Well, for each holiday year, a worker is entitled to 5.6 weeks’ leave (statutory minimum). When calculating holiday entitlement as a percentage, you acknowledge that those 5.6 weeks of the year will not be worked so it is calculated as 52 weeks minus 5.6 weeks which is 46.4 weeks; then 5.6 divided by 46.4 is 12.07%.
Casual / zero hours working is particularly common in the manufacturing industry where shift systems are operated or the workforce may be transient.
Then:
In October 2005, use of the 12.07% rolled-up holiday method was ruled unlawful by European Court of Justice (ECJ) in a judgment based on a number of cases. This was because the purpose of the Directive was for paid leave to be taken such that workers had adequate rest and respite during the holiday year, rather than it being merely an entitlement to pay. It was perceived that the payment of rolled up holiday pay disincentivised workers from taking holidays as they were being paid for them anyway. This was then enacted in the UK by the Department for Trade and Industry in April 2006.
In November 2014, based on a group of cases known collectively as Bear, Hertel and Amec, the Employment Appeal Tribunal (EAT) found that workers should have regular overtime factored into their holiday pay; however, this was limited to the original EU entitlement of 4 weeks with the remaining 1.6 weeks being paid at basic pay.
It is an industry norm for paid overtime to be worked, whether or not this is formalised in the Contract of Employment.
On 1 July 2015, the Deduction from Wages (Limitation) Regulations 2014 came into effect which meant that workers could only make claims for underpaid holiday pay going back two years.
In October 2016, following an ECJ ruling in Lock v British Gas the Court of Appeal similarly found that workers should have commission payments factored into their holiday pay. The Bear, Hertel and Amec, and Lock cases were taken in combination to also determine that performance-related bonuses should be included in the calculations for holiday pay.
Manufacturing businesses will often have salespeople employed with an element of commission included in their pay structure.
Again, this was limited to the original EU entitlement of 4 weeks with the remaining 1.6 weeks being paid at basic pay. In practice, however, most employers applied the rulings to the whole 5.6 weeks’ entitlement for administrative ease.
In June 2019, the Northern Ireland Court of Appeal found in Agnew v Chief Constable of the Police Service of Northern Ireland that the “breaking” of a chain of deductions by having three months between them should not apply.
In July 2022, the Supreme Court found in Harpur Trust v Brazel that any worker on a part year contract, or any other contract under which they do not work every week is entitled to the full 5.6 weeks’ holiday per year and not a pro-rated entitlement. This was because the ‘conformity principle’ contained in the EU Working Time Directive (which provided that anyone working less than full time, be that hours per week or weeks per year, would have a pro-rated entitlement) was not included in the Working Time Regulations when they were enacted in the UK.
The ruling was that holiday pay should be calculated by reference to the preceding 52 weeks in which work was performed. So, where there is a week in which no work was performed, this week would be discounted, and you would need to go back until you have 52 weeks. You would then take the total pay over those 52 weeks and divide by 52 to give the average weekly pay which would then be used for holiday pay.
This led to a situation where employers were needing to pay some atypical workers a full 5.6 weeks’ holiday each year, regardless of the number of weeks they actually worked.
Organisations in the manufacturing industry often have seasonal fluctuations leading them to require part-year workers, employees on variable hours contracts, or casual workers.
But then:
On 1 January 2024, “new” rules came into effect, acting to enshrine the above UK and EU case law into statute. The changes applied to holidays years commencing on or after 1 April 2024 and stated that holiday pay must be calculated by reference to “normal” remuneration.
This was defined as including:
commission payments or bonuses which are intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out
(so, where commission is earned and allocated jointly within a team, or where ad hoc bonuses are paid across the board e.g. at Christmas, this payments will not have to be included)
overtime payments, which have been regularly paid to a worker in the 52 weeks prior to the holiday being taken
(so, if people work overtime on a very irregular, ad hoc basis, it will not have to be included)
Again, this only applies to the original EU entitlement of 4 weeks, not to the remaining 1.6 weeks.
Additionally, however, a “new” accrual calculation for variable hours and part year workers was introduced such that employers were allowed to calculate holiday entitlement on an accrual basis using a 12.07% calculation. Sound familiar??
This was because it was recognised that a 52-week calculation was unnecessarily complicated and burdensome on employers, leading to a large volume of Tribunal cases relating to underpaid holiday pay. Additionally, since the original ruling back in 2005, the UK had seen the rise of the “gig economy” with many more workers being engaged on casual or zero hours contract.
So where does all of this leave us??
For all holiday years commencing on or after 1 April 2024 (which will be all holiday years now):
- the minimum full time entitlement of 5.6 weeks inclusive of public holidays can be pro-rated for anything less than full time including part-time, zero hours, variable hours, part-year workers and casual workers.
- any regularly worked overtime must be included in the calculations for holiday pay (note, this does not have to be contractual) for the first four weeks of leave.
- any bonuses or commission payments which are intrinsically linked to performance must also be included in the calculations for holiday pay for the first four weeks of leave.
- where holiday pay has been underpaid, claims for backpay can go back over two years even where there are three months or more between incorrect payments.
- casual workers, Zero Hours and Variable Hours employees can be paid rolled-up holiday pay; however, employers are still required to ensure that such workers take adequate leave during the holiday year. Employers can choose to continue to use a 52-average to pay holiday pay at the time it is taken if they prefer.
How does this impact the manufacturing sector?
Where overtime is worked regularly in the manufacturing industry, whether or not this is formalised in the Contract of Employment, holiday pay calculations should take this into account. At the time that a worker takes holiday, a week’s pay for this purpose should be calculated by reference to average weekly pay over the preceding 52 weeks (or the preceding 52 weeks in which work was performed).
Where salespeople employed in manufacturing businesses have an element of commission included in their pay structure, these commission payments will be directly linked to their performance, therefore holiday pay calculations should take this into account. At the time that a worker takes holiday, a week’s pay for this purpose should be calculated by reference to average weekly pay over the preceding 52 weeks (or the preceding 52 weeks in which work was performed).
Where organisations in the manufacturing industry have seasonal fluctuations which lead them to require part-year workers, employees on variable hours contracts, or casual workers, holiday entitlement can be pro-rated accordingly. Such employers can choose to pay using a 52-week average at the time it is taken, or can use rolled-up holiday pay at 12.07% if they prefer.
