· TestSafe Compliance
Holiday pay is the single most common arrears liability we uncover during Fair Work Agency pre-assessments in Devon. Care homes, hospitality operators and salons are particularly exposed, often because of a quiet reliance on the 12.07 percent shortcut, on rolled-up arrangements that no longer fit the worker, or on calculations that quietly exclude regular overtime. This piece works through what the law requires and where Devon employers consistently get it wrong.
Quick answer: Variable hours workers must be paid holiday at their average weekly earnings over the last 52 paid weeks, including regular overtime and commission. The 12.07 percent shortcut is unlawful for part-year workers on permanent contracts (Harpur Trust v Brazel). Rolled-up holiday pay is only lawful for irregular hours and part-year workers, paid at 12.07 percent and shown separately on the payslip.
In every Fair Work Agency pre-assessment we have run for a Devon employer with variable hours staff, holiday pay has been the largest single arrears liability uncovered. National Minimum Wage gaps tend to be obvious once you check a payslip against an hourly rate. Right to work gaps tend to be documentary, the check happened but the record is missing. Holiday pay is different. It is a calculation problem, and the calculation is wrong in ways that compound quietly across a workforce of twenty or thirty people for years.
The reason is that the rules have changed several times in the last decade, the case law has moved in ways most payroll software has not caught up with, and the simplest answer (a flat 12.07 percent on hours worked) was made unlawful for a large group of workers by the Supreme Court in 2022 and then partially reinstated by Parliament for a different group in 2024. The result is that you can be running payroll software that does exactly what it has always done and still be carrying back pay liability for every variable hours worker on your books.
The legal framework for holiday pay in Great Britain comes from two main sources. The Working Time Regulations 1998 set out the entitlement, 5.6 weeks of paid annual leave for almost every worker, made up of four weeks of EU-derived leave and 1.6 weeks of domestic additional leave. Regulation 16 of those regulations governs the rate of holiday pay. Where a worker has normal working hours and the same pay each week, the calculation is simple, a week of leave costs a week of normal pay. Where a worker does not have normal working hours, or has normal hours but variable pay, regulation 16 imports the calculation rules from sections 221 to 224 of the Employment Rights Act 1996.
Those sections require an average to be taken over a reference period. Since April 2020 the reference period for variable hours workers has been 52 weeks rather than the previous 12. Crucially, only weeks in which the worker actually received pay count. Weeks with no work and no pay are excluded and earlier weeks pulled in to make up the 52, with the look-back capped at 104 weeks in total. This matters because a worker on a zero-hours contract who has a quiet month should not have that quiet month dragging down their holiday pay average. The law explicitly protects against that.
For years the standard industry approach for variable hours workers was to pay holiday at 12.07 percent of hours worked. The figure comes from a simple arithmetic, 5.6 weeks of leave divided by 46.4 working weeks in a year. It was endorsed by ACAS guidance for a long time and it is still embedded in most payroll software.
In Harpur Trust v Brazel [2022] UKSC 21, the Supreme Court ruled that this approach was unlawful for part-year workers on permanent contracts. Mrs Brazel was a visiting music teacher employed by the Harpur Trust on a permanent term-time-only contract. She worked variable hours during term time and did not work, or get paid, during school holidays. The Trust calculated her holiday pay at 12.07 percent of hours worked over the term. The Supreme Court held that the Working Time Regulations did not permit that approach. She was entitled to 5.6 weeks of leave calculated using the averaging method in regulation 16, and the weeks she did not work were simply excluded from the average. The practical effect is that a part-year worker on a permanent contract can receive a noticeably higher rate of holiday pay than a full-year worker doing the same hours.
The implications for Devon employers are significant. Anyone running term-time-only staff, seasonal staff on permanent contracts, or any other arrangement where the contract is permanent but the work is not year-round, is at risk if they are using the 12.07 percent shortcut. We see this regularly in school catering, in tourism businesses with permanent staff who only work the season, and in care providers running permanent bank staff.
Even where the 52-week averaging method is being used correctly, the calculation often understates the true rate by leaving out elements of pay that the case law says must be included. The position now is settled across a line of cases:
Strictly, this applies in full to the four weeks of EU-derived leave. The additional 1.6 weeks of domestic leave can lawfully be paid at basic pay only. In practice, almost every employer we work with pays the same rate across all 5.6 weeks because trying to operate two parallel rates is a payroll nightmare and creates more risk than it removes.
Rolled-up holiday pay was banned by the European Court of Justice in 2006 (Robinson-Steele) because it discouraged workers from actually taking their leave. For nearly two decades it was technically unlawful in the UK, although it remained widespread in practice, particularly in agency and hospitality work.
The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 reintroduced rolled-up holiday pay from 1 January 2024, but only for two categories of worker: irregular hours workers and part-year workers, as defined in the new framework. For those workers, an employer can pay holiday pay as a 12.07 percent uplift on each pay packet for hours actually worked, provided three conditions are met:
If any of those conditions is missing, the rolled-up arrangement is unlawful and the worker can claim that they have not in fact received their statutory holiday pay. The most common gap we find is the payslip presentation, the uplift is rolled into "hourly rate" or "gross pay" rather than shown separately, which means the worker cannot identify what they have been paid as holiday and the arrangement falls outside the regulations.
Rolled-up holiday pay is only available for irregular hours workers and part-year workers under the 2023 Regulations. It is not available for workers on fixed hours, fixed shifts or regular salary. We regularly find Devon employers using rolled-up holiday pay arrangements with their full-time fixed-hours staff because that is how they have always done it, or because the practice has been carried across from a previous owner. In every one of those cases, the holiday pay element has not been lawfully paid. The worker is entitled to claim their statutory holiday pay over the relevant reference period and the employer carries the back pay liability.
The other failure mode we see is at the boundary. A worker who started on irregular hours and moved onto a fixed shift pattern is still on the original rolled-up arrangement because nobody changed the contract. Under the new framework they may well no longer meet the definition of an irregular hours worker, which means the rolled-up arrangement is no longer lawful for them. The cleanest test is simple: if the worker has a settled working pattern that you could write down in advance, rolled-up holiday pay is not the right vehicle.
The default position is that statutory leave must be taken in the leave year it accrues, or it is lost. There are three main exceptions that allow carry-over into a later year:
The Pimlico Plumbers point catches a lot of Devon employers off guard. Mr Smith had been treated as self-employed for years and had never been told he was entitled to paid leave. The Court of Appeal held that where an employer fails to inform a worker of their right to paid leave, fails to give them a genuine opportunity to take it, and fails to make clear it will be lost if not taken, the leave carries over indefinitely until the worker is given that opportunity or the employment ends. When it ends, the worker can claim payment in lieu for the full accumulated amount.
The implication is uncomfortable. Any worker on your books who has been miscategorised as self-employed, or who has been on a rolled-up arrangement that did not properly enable leave to be taken, may have years of accumulated holiday pay entitlement that crystallises into a cash liability the day the relationship ends. This is one of the most expensive findings we make on an employment compliance audit, and it is one of the hardest to defend if the FWA finds it first.
If you suspect a gap, the calculation is mechanical. The work is in pulling the data accurately.
In practice, the six-year reach is more theoretical than practical, since the chain of unlawful deductions can be broken by a gap of more than three months between underpayments. But the FWA can still require back pay across the full period it considers reasonable in any individual case, and we always work to a six-year horizon when we scope the exposure.
The sectors we see the highest exposure in are predictable. The common factor is variable hours combined with informal arrangements that nobody has reviewed since they were set up.
Care homes have zero-hours bank staff, regular non-guaranteed overtime when shifts need covering, sleep-in payments that may or may not count toward holiday pay depending on how the contract is written, and (in some cases) rolled-up arrangements that pre-date the 2023 reintroduction and have never been brought into compliance. Holiday pay calculation is also frequently done on basic hours only, missing the overtime and the sleep-in elements, which understates the average significantly.
Hospitality in Devon is highly seasonal. Permanent staff on year-round contracts who only work the season are squarely in Harpur Trust territory. Tronc payments and service charges create a question about what counts as normal remuneration. Tips under the 2024 Tips Act are a separate question but they interact with the holiday pay calculation, and getting that interaction wrong is one of the cleanest ways to create a liability.
Hair and beauty salons run on commission, chair rental and self-employment arrangements. Where the chair rental is genuine the holiday pay question does not arise, but where the worker is in reality an employee or worker, the commission element must go into the holiday pay average. The "self-employed" label does not survive an FWA investigation if the substance of the arrangement points the other way.
The Fair Work Agency launched in April 2026 with consolidated powers across what used to be three separate enforcement bodies. Holiday pay is one of the inspection areas it has flagged as a priority, and its enforcement powers are real. Where the FWA finds an underpayment, it can:
The naming threshold is low. A care home with twenty bank workers each owed a couple of hundred pounds in holiday pay arrears clears it easily. The public naming list is published by Government and picked up by trade press, local media, CQC inspectors and prospective staff. The reputational hit usually outweighs the financial penalty.
A Fair Work Agency pre-assessment mirrors the inspection areas the FWA will examine on a visit. Holiday pay calculation is one of the largest sections of the audit because, on the evidence of every assessment we have run so far, it is where the largest arrears liabilities sit.
If you have read the above and recognised yourself, the position is recoverable. The FWA is materially more interested in employers who have identified a gap, recalculated, paid arrears and documented the fix than it is in employers who are still operating the unlawful arrangement on the day the inspector arrives. The steps are:
The documented fix matters as much as the payment. An employer who paid arrears two years ago and cannot produce the working will still get pressed on whether the calculation was right. An employer who can hand over a spreadsheet, a methodology note and a set of revised payslips closes the issue down quickly.
When we run a Fair Work Agency pre-assessment for a Devon employer, holiday pay is treated as its own section of the audit. We sample variable hours workers across the workforce, pull the relevant 52 weeks of payroll for each, recalculate the true average, compare to what was actually paid, and quantify the exposure in pounds. We also examine the contract terms, payslip presentation and any rolled-up arrangement to identify whether the arrangement is lawful for each worker as it stands.
The output is a written gap analysis showing exactly what an FWA inspector would find. Where the gap is small and the fix is mechanical, we set out what to do. Where the gap is larger or the legal categorisation is contested, we tell you clearly that the next step is a regulated employment solicitor and we will refer you. We do not provide regulated legal advice and we do not represent in proceedings. What we do is the diagnostic work that tells you whether you have a problem, how big it is, and what shape it is.
For most Devon employers, the half day on site and the written report within five working days produces a clear picture they can act on, on their own terms, before an inspector arrives.
This article is for general information only and reflects the law as it stood on the date of publication. It does not constitute legal advice and should not be relied upon as a substitute for advice specific to your situation. TestSafe Compliance provides audit and assessment services only. Where a specific legal question arises, seek advice from a qualified solicitor or employment law specialist.
Only in narrow circumstances. The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 reintroduced 12.07 percent as a lawful method for paying holiday to irregular hours workers and part-year workers, and only where it is paid as rolled-up holiday pay, shown separately on the payslip, with the worker still able to take their statutory leave. For any worker who falls outside those two defined categories, including a part-year worker on a permanent contract who is not an irregular hours worker, the 12.07 percent shortcut is unlawful following Harpur Trust v Brazel. Most payroll software still applies it by default, which is why we find this gap so often.
For a worker without normal working hours, or with normal hours but variable pay, holiday pay is calculated by averaging weekly pay across the previous 52 weeks. Only weeks in which the worker actually received pay count toward the 52. Weeks with no work and no pay are skipped, and earlier weeks pulled in to make up the number, with the overall look-back capped at 104 weeks. The calculation comes from regulation 16 of the Working Time Regulations 1998, which incorporates the averaging rules in sections 221 to 224 of the Employment Rights Act 1996. The reference period was extended from 12 weeks to 52 weeks in April 2020 to prevent seasonal dips dragging down a worker's holiday pay rate.
Yes, for the four weeks of EU-derived statutory leave. Bear Scotland v Fulton [2014] confirmed regular non-guaranteed overtime must be in the average. Flowers v East of England Ambulance Trust [2019] extended that to regular voluntary overtime where the pattern is settled and recurring. Commission that is intrinsically linked to the work must also be included, following Lock v British Gas Trading. Strictly, the additional 1.6 weeks of domestic leave can be paid at basic pay only, but most employers pay all 5.6 weeks at the inclusive rate to avoid running two parallel calculations through payroll. Excluding overtime is the single most common arithmetic error we find.
Rolled-up holiday pay returned to lawful use on 1 January 2024 under the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, but only for irregular hours workers and part-year workers as defined in the new framework. It must be paid at 12.07 percent of the total pay for work done in the pay reference period, shown as a separate clearly identifiable line on the payslip, and the worker must still be permitted and encouraged to take their statutory leave. Using rolled-up holiday pay for fixed-hours workers is unlawful and creates back pay liability. Bundling the uplift into "hourly rate" rather than showing it separately also breaks the arrangement.
The FWA can issue a Notice of Underpayment requiring the employer to pay the arrears directly to the workers affected. It can impose a financial penalty of 200 percent of the underpayment, capped at £20,000 per worker. It can publicly name the employer where the total underpayment across the workforce exceeds £500, with the naming list published by Government and routinely picked up by media, regulators in the relevant sector (such as CQC for care) and prospective staff. Serious or repeat breaches can be referred for criminal prosecution. Arrears themselves can in principle be claimed for the previous six years, depending on the chain of deductions.
Half a day on site, written gap analysis within five working days. Devon-based, fixed price.