Cornwall businesses warned over new ‘onerous’ holiday pay rules

If anyone on your payroll works fixed hours but regularly picks up overtime, a shift allowance, commission or a bonus, there is now a sum you have to get right every single time that person books a day of annual leave. Get it wrong, and a government inspector could be knocking on the door two years later with a backpay bill attached.

What changed on 6 April

The trigger is the government’s launch of the Fair Work Agency (FWA) on 6 April, a date now being called R-Day (Records Day) within HR and payroll circles. From that date, employers have to maintain holiday entitlement and pay records and keep them for six years, in line with National Minimum Wage record-keeping.

The records have to show annual entitlements, when leave was taken and what each employee was paid for every period of leave, including any pay in lieu of holiday when someone’s employment ends. The FWA has the power to inspect business premises, demand production of those records, and impose criminal sanctions and unlimited fines for non-compliance.

Based on the latest official figures, there are 235,000 VAT and/or PAYE registered businesses across the South West, meaning a large number of local firms are potentially affected.

Where fixed hours, variable pay trips people up

H-J Dobbie, Head of HR Consultancy at Azets, the UK top 10 accountancy and business advisory firm with an office in Truro, says the principle behind the new rules is simple enough. The working reality is a different matter.

Holiday for workers with variable hours and variable pay can be calculated using the ‘percentage method’, and holiday for staff on fixed hours and fixed pay is straightforward, H-J explained. The trouble starts with the group in between, workers on fixed hours but variable pay, for example those who regularly work overtime, receive allowances or commission, or are paid shift premiums.

“Typically, HR will deal with holiday entitlement calculations and payroll will deal with holiday pay,” H-J said. “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.”

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Why the ‘calendar method’ is causing a headache

The calculation for fixed hours, variable pay workers relies on what is known as the ‘calendar method’, and H-J says it is so complicated that employers often do not 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,” she said. “We are identifying underpayments where workers have not had variable pay components such as regular overtime, shift premiums, et cetera, included in their holiday calculations.”

Many workers are paid monthly, but the calculation itself has to be done weekly, and H-J says there is little or no guidance on how that works in reality, since no one she has spoken to has found an example in the government guidance that fits their situation.

“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,” she said. “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.”

Holiday pay under this method has to be worked out every time a worker takes leave rather than as a single annual sum, so it is a calculation carried out multiple times per worker, per year. “We haven’t found two employers tackling this in the same way,” 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.”

The panic among well-run companies

H-J says the businesses getting in touch are not trying to cut corners. Many are worried they have been underpaying staff without realising it, and may have to go back as far as two years to put things right.

“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,” she said. “What’s more, they are terrified that the new Fair Work Agency 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.” She added that it wouldn’t be an overstatement to say thousands of businesses, particularly smaller ones without experienced HR and payroll teams, are struggling with the paperwork required to comply.

The cost of getting it wrong

“Getting holiday pay calculations wrong not only invites an investigation by the Fair Work Agency but opens the door to a costly employment tribunal and compensation pay-outs,” H-J warned. “Asking someone to forgo holiday entitlement to cover for other colleagues, due to staff shortages, will only end in financial tears.”

Government research has highlighted the scale of the problem nationally: 900,000 UK workers have holiday pay withheld annually, worth £2.1 billion between them, and nearly 20% of minimum wage workers are underpaid.

The figures involved can be enormous. In a recent employment tribunal decision, a long-serving former member of staff was awarded £391,942.77, before tax and National Insurance, after his employer failed to pay his holiday entitlement, which amounted to 827.25 days.

Getting HR and payroll onto the same page

Azets flagged the potential issues around R-Day earlier this year. Julie Gunnell, Associate Director for Growth Payroll at Azets, said at the time that many businesses had not seen it coming.

“Many businesses haven’t seen this coming and are not prepared, it’s been like a bolt out of the blue,” Julie said. “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.”

“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,” Julie added. “Without this alignment, businesses risk compliance failures and potential criminal prosecution for worker exploitation.”

Employers are being urged to put robust systems in place, whether digital or physical, so that holiday and pay records are securely stored and easily accessible to authorised staff, and to work out now, rather than after an FWA visit, exactly who owns that data and where it lives.