What is the holiday pay and entitlement for zero-hours contract workers?

How much holiday are you entitled to if you’re on a zero-hours contract? And how is holiday pay calculated? Samantha Cass and Laura Herbert of Birketts LLP explain what you need to know about zero-hours contracts.

What are zero-hours contracts?

Zero-hours contracts are usually casual, ad-hoc working arrangements with no guaranteed working hours.

There is no legal, or universally accepted definition of a ‘zero-hours contract’, however ACAS defines a zero-hours contract as a working relationship where “there is no obligation for employers to offer work, or for workers to accept it." In practice, however, the employer might be under no obligation to offer work but there might be an obligation for the employee to be available for work and to accept a minimum amount when it is offered. This is usually set out in the terms of a contract.

It should also be noted that the terms of a zero-hours contract do not necessarily determine the employment status of those who are under such a contract. Case law has established that it is necessary to look at the reality of the working relationship between the parties to establish the employment status and the individual’s associated employment rights.

Broadly speaking, someone working under a zero-hours contract is usually considered to be a ‘worker’. This means that they are entitled to:

the national minimum wage (NMW)
paid annual leave
a 48-hour limit on the average working week
rest periods under the Working Time Regulations 1998 (WTR 1998)
protection against discrimination

However, workers are not entitled to the same family leave rights as employees.

What are the pros and cons of zero-hours contracts?

Pros: businesses can offer someone flexible working arrangements to suit both the organisation’s financial circumstance and the worker’s needs, sometimes with no commitment required from either party.

Cons: zero-hours contracts have been criticised as a means of taking advantage of low-income workers, providing no guaranteed income for vulnerable workers. There are proposals in the pipeline aimed at restricting the use of such contracts.

How do you calculate the holiday entitlements and pay for zero-hours contract workers?

Most workers, including part-time workers, have a right to a minimum of 5.6 weeks' paid annual leave under the WTR 1998, but the legislation does not clarify how this should be calculated. The challenge for an employer is calculating, in advance, the individual's annual holiday entitlement in days or hours, without knowing at the start of the year how many days or hours they will work that year.

The generally accepted method for calculating holiday entitlement and pay for a casual worker, based on 12.07% of the hours worked in that holiday year (a figure which represents holiday entitlement as a percentage of hours worked), was criticised in a recent decision for being unreliable in circumstances where the individual works part of the year or under an umbrella contract. The longer the period without work, the more inaccurate the calculation.

If the employer has workers who do not work every week of the year as a matter of course, there are two main options:

Make use of the 12.07% rule and undertake a review of holiday taken and paid before the end of each holiday year (and at the end of a contract) and reconcile any allowance and payment to ensure that each worker receives at least 5.6 weeks' paid annual leave per year.
Calculate days or hours worked each week based on a representative reference period as recommended by Government Guidance for 'casual, irregular or annualised hours'. However, this can take time as it requires a calculation each time holiday is taken. Since 6 April 2020, for workers with no normal working hours, a 52-week reference period is required to calculate holiday pay under the WTR 1998.

Do you have to pay zero-hours contract workers’ remaining holiday when they leave?

In short, yes you must pay zero-hours contract workers’ any remaining holiday when they leave their role. The Government Guidance on calculating holiday pay when someone joins or leaves part way through a year is clear and businesses should pro rate the individuals’ remaining holiday and make any outstanding payments in the final payslip. The calculation is as follows:

Statutory Holiday Entitlement = 5.6 weeks x proportion of leave year in employment

Do you have to pay zero-hours contract workers sick pay?

Zero-hours contract employees are eligible for Statutory Sick Pay (SSP) if they:

are absent from work for four or more consecutive days (including non-working days)
work under a contract of employment
meet the average weekly earnings requirement (currently £120 per week)

The definition of an ‘employee’ for the purposes of SSP is wide and includes all those whose earnings are liable for Class 1 National Insurance contributions. This means that a zero-hours contract worker could qualify for SSP, which is currently £95.85 per week.

Businesses with individuals who meet the above criteria will need to calculate the individual’s average weekly earnings for an eight-week period from the beginning of the period of absence using payslips to work out whether SSP is payable. If they have not yet received eight weeks’ pay, the business should calculate average pay by reference to actual earnings and divide this by the number of weeks or days to which the pay relates.

If an employee is only unfit to work for part of a week, SSP is based upon how many ‘qualifying days’ there are in that week and how many of those are days of incapacity. Qualifying days are the days when someone usually works. It will be clear which days are ‘qualifying days’ for those who have a set working pattern, however if there is no set working pattern, the first thing to check is whether the contract refers to SSP and, if so, whether it specifies which days are qualifying days. If there is no agreement, employers can try to agree which days would have been working days in each week amicably. The strict legal position is that every day will be a qualifying day if there is no set pattern and no agreement between the relevant parties.

Laura Herbett Birketts Samantha Cass