‘Calendar method’ calculations for thousands of baffled businesses don’t add up following complicated government compliance
Businesses in Britain could well be struggling with new “onerous responsibility” over holiday entitlement and pay compliance, it emerged today.
The issue follows the government’s 6 April introduction of the Fair Work Agency and new rules.
According to latest annual business activity figures from the Office for National Statistics, there are 2.73 million VAT and/or PAYE businesses in the UK, meaning a lot of companies are potentially impacted.
Employers now have to maintain holiday entitlement and pay records and keep them for six years, in line with National Minimum Wage records.
Records must contain annual entitlements, when leave is taken and what employees are paid for each period of leave, including any pay in lieu of holiday upon termination.
The principle is simple, but the working reality is somewhat more complex, says H-J Dobbie, head of HR consultancy at Azets, a UK top 10 accountancy and business advisory firm.
She said: “Typically, HR will deal with holiday entitlement calculations and payroll will deal with holiday pay.
“But with the new onerous responsibility requiring all the data to be in one place and easily accessible, it means HR and payroll will need to work more closely together than ever before.”
Holiday for workers with variable hours and variable pay can be calculated using the ‘percentage method’, and holiday for workers with fixed hours and fixed pay is straightforward, H-J said.
But she warned this is not the case when it comes to workers with fixed hours but variable pay.
“For example, if they regularly work overtime, receive allowances or commission or are paid shift premiums.
“The calculation for these workers, based on the ‘calendar method’, is so complicated that employers often don’t know where to start.
“What has come to light is that employers do not understand the calendar method or how to calculate holiday pay correctly.
“We are identifying underpayments where workers have not had variable pay components such as regular overtime, shift premiums, etcetera, included in their holiday calculations.
“Employers are in a state of panic as they don’t know how much will be owed to employees when the extent of the underpayments is known, especially as they may have to go back as far as two years to make good with their workers.
“What’s more, they are terrified that the new Fair Work Agency (FWA) will impose hefty fines or open criminal investigations for worker exploitation even though they are trying to do right by staff.
“I’m getting calls from bosses of well-run companies worried sick about falling foul of compliance through no fault of their own; they want to ensure staff are paid what they are owed, but the calculation method is so difficult for what appears to be the largest group of workers, that it leaves them exposed, and as of now, we haven’t found two employers tackling this in the same way.
“Bear in mind that holiday pay has to be calculated each time a worker takes leave, so this is not just a one-off annual calculation, rather it has to be carried out multiple times per worker, per year.
“It wouldn’t be an overstatement to say that thousands of businesses, particularly smaller ones without experienced HR and payroll teams, are struggling with the concept of the paperwork that is required to comply.”
Many workers are paid monthly but the calculation has to be done weekly.
There is little or no guidance on how this works in reality, as no one has yet found an example in the government guidance that fits their situation, H-J said.
She added: “Incredibly, there is no payroll or HR system capable of handling this holiday pay scenario, based on the so-called 52-week calendar method, which is why this particular rule is causing employers such a headache.”
“It is also daft calling it the 52-week calendar method, as employers may have to go back up to 104 weeks to count sufficient weeks.”
The rules are mainly aimed at protecting staff on fixed hours who receive variable pay components, such as overtime, bonuses, commission and allowances, and holiday paid in lieu upon termination of employment.
“Few businesses are getting their heads around this 52-week calendar method,” H-J said.
“They’re coming up with all sorts of weird and wonderful ways to calculate what they think the differences are, but the sums don’t add up.”
H-J warned: “Getting holiday pay calculations wrong not only invites an investigation by the FWA but opens the door to a costly employment tribunal and compensation pay-outs.
“Asking someone to forgo holiday entitlement to cover for other colleagues, due to staff shortages, will only end in financial tears.”
The FWA launched in April with enforcement powers to inspect premises, demand records and impose unlimited fines or criminal sanctions for non-compliance.
Government research highlighted the scale of the issue: 900,000 UK workers annually have holiday pay withheld, worth £2.1bn, and nearly 20% of minimum wage workers are underpaid.
With enforcement powers, the FWA can inspect business premises, demand production of records and impose criminal sanctions and unlimited fines for non-compliance.
From 6 April, the start of the new tax year, and dubbed R-Day (Records Day), all employers must centrally retain accurate records of holiday entitlement, holiday pay calculations and annual leave processed through payroll for six years.
Robust systems must be implemented so that records are securely stored and easily accessible to authorised staff, whether digitally or physically.
Earlier this year, Azets highlighted the potential issues relating to R-Day.
“Many businesses haven’t seen this coming and are not prepared – it’s been like a bolt out of the blue,” said Julie Gunnell, associate director – growth payroll at Azets, cautioned at the time.
“R-Day is a wake-up call. Employers need clear protocols for record access and ownership. If the FWA comes knocking and records are fragmented across HR and payroll, it becomes an admin emergency.”
Julie added: “This legislation is a game-changer – it ensures HR and payroll teams work collaboratively, rather than maintaining separate records, to create a single source of truth.
“Without this alignment, businesses risk compliance failures and potential criminal prosecution for worker exploitation.”
In a recent employment tribunal decision, a long-serving former member of staff was awarded £391,942.77, before tax and National Insurance, because his employer failed to pay the claimant’s holiday entitlement which amounted to 827.25 days.