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Payroll Tip: Holiday pay for shift workers

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These questions are being answered by Learn HR, a market leader in the provision of HR and payroll training and nationally-recognised professional qualifications.


Q: How should holiday pay be calculated for shift workers whose earnings vary because they are paid premium rates for work performed at different times of the day?

A: The calculation of holiday pay is a contractual matter but the rate at which it is paid may not be less than the statutory calculation defined in the Employment Rights Act 1996. The “week’s pay” rules are complex and not always easy to apply to particular situations. They are used, not just for calculating statutory holiday pay, but for many other statutory payments:

  • statutory guarantee payments
  • redundancy
  • time off to look for work and arrange training
  • time off for ante-natal care
  • time off for employee representatives
  • time off for study and training
  • medical suspension pay
  • maternity suspension pay
  • pay during periods of notice

There are special calculation rules that apply when a worker’s pay for work performed during normal working hours varies according to the day, or the time of the day, that the work is performed. This commonly applies where shift workers are paid premium rates when they work late shifts, or night shifts, or at weekends. Note that this is not talking about overtime rates, i.e. premium rates that are paid for work performed outside of normal working hours.

The statutory rate at which holiday pay is paid for shift workers in this situation is not their basic rate of pay. Rather, it is based on their average earnings in the 12 weeks preceding the start of the holidays. A “week’s pay” for a shift worker is calculated by multiplying:

  • the average number of hours worked during normal working hours in the relevant twelve week period, multiplied by
  • the worker’s average hourly rate in respect of that twelve-week period.

The terms used here must be explained.

Normal working hours
These are the fixed number of weekly hours defined in the worker’s contract. It normally excludes any overtime hours. Overtime hours are only included if, under the contract, the employer must provide overtime and the employee must work it.

Relevant twelve-week period
This is the twelve-week period prior to the first day of the worker’s holiday period. A “week” for this purpose is either:

  • a seven-day period ending on a Saturday, or
  • if the worker is paid weekly, the last day of the worker’s pay period.

Average number of hours
This is the total number of normal working hours worked by the worker in the twelve weeks, divided by 12.

Average hourly rate of pay
This is the total number of actual working hours worked by the worker in the twelve weeks, divided into the pay for those weeks, including bonuses and commissions (apportioned if necessary), but excluding the premium element of any overtime.

Note that it is not the pay in the twelve weeks that is averaged, but the pay in respect of the work performed in the twelve-week period.

Example
A weekly-paid employee is taking two weeks holiday starting Monday, 22 November 2004. The employee works three rolling shifts, for each of which a different rate of pay applies. The contractual working week is 40 hours and the basic hourly rate of pay is £8. The employee also works overtime regularly and this is paid at various premium rates.

The period for which the employee is paid each week runs from Saturday to Friday. Payment is made a week in arrears. The twelve week period for calculating the averages is the twelve weeks to Friday, 19 November.

The employee’s average weekly hours are 40. This is the total number of normal hours in the 12 weeks, i.e. 480, divided by 12.

The employee worked 140 hours overtime in the twelve weeks, so the total number of hours worked in the twelve weeks is 620. The pay for those 620 hours was £7,442. The overtime was paid at time and a half, so the premium part of the overtime, £560, is deducted, leaving pay for the twelve weeks of £6,882. The average hourly rate of pay is, therefore, £11.10, i.e. £6,882 ÷ 620.

A “week’s pay” for the employee is £444, i.e. 40 (the average weekly hours) multiplied by £11.10 (the average hourly rate of pay). The employer must pay at least £444 for each week of the employee’s holidays.

An employer may, of course, use a different contractual method to calculate holiday pay for shift workers, but the result may not be less, in any particular case, than the statutory payment.

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