In most cases, calculating holiday pay and benefits is based on the number of hours an employee works within a given period of time. But what happens if an employee is not contractually obligated to work a certain number of hours? What PTO rights do employees on a contract with zero hours have? We have all the answers you’re looking for. In this post, we’ll guide you through the process of calculating zero-hours contract holiday pay.

What is a zero-hours contract?

At first glance, a ‘zero-hours’ contract sounds pretty contradicting. After all, how do you employ someone for them to work just zero hours? 

Here’s the thing — you don’t. 

Zero-hours contracts, as fun as they sound, don’t mean that there’ll never be any work. It just means that no set working hours are guaranteed. There may be an agreement for the employee to be available to work when and as needed, without specifying a time or number of hours. For these employees, their hours could range from anywhere from 5 to 40, or even more. And that changes every week depending on the needs of the company. 

This type of casual employment contract is also one of the most popular ones offered by employers in the UK. According to the UK Office for National Statistics, over 900,000 people are employed under zero-hours contracts. That is roughly 2.9% of the employed workforce, which is undoubtedly a big chunk of workers. 

How to calculate a zero-hours contract holiday pay

Generally, zero-hour workers are classified as employees under many employment legislations. As such, their benefits include:

• benefits such as the National Minimum Wage (NMW)
• holiday pay,
• and statutory rest breaks.

Under the UK’s Working Time Regulations 1998, all workers and employees have a legal right to at least 5.6 weeks of paid holiday annually. This works out to be 12.07% of an employee’s total hours, which is a figure many businesses use to calculate zero-hours contract holiday pay.

For full-time employees working five days a week, that is 28 days per year. However, figuring out the amount for those on zero-hour contracts can be tricky. It is usually based on the number of hours they work. So, if you want to calculate holiday pay and entitlement for your zero-hours contract employees, you’re going to have to calculate it separately for each individual employee.

These workers accrue holiday entitlement in the same manner as full-time or part-time employees. The only difference is that there are breaks in employment. A casual worker, for instance, may work for two weeks in January, and not work again until April. So although the principle sounds simple in theory, sometimes the calculation for the worker’s entitlement can be quite complicated. Here are a few ways you can go about calculating zero-hours contract holiday pay.

Calculate using the 12.07 rule

Given the difficulty of calculating zero-hours contract holiday pay, it has become common for employers to treat these workers as having accrued holiday pay at the rate of 12.07% of the hours they’ve worked. 

This accrual rate is derived from the fact that the standard working year is 46.4 weeks (52 weeks minus the statutory 5.6 weeks holiday entitlement) and 5.6 weeks is 12.07% of 46.4 weeks. Let us make it simple for you — it basically means 7 minutes of holiday for every hour worked.

So, let’s say an employee with a zero-hours contract works 20 hours a week at your company. 

To work out how much leave they get from that week, you can:

• Start by dividing the number of hours they work (20) by 100
• Multiply it by 12.07
• Thus, you can see they have earned approximately 2.4 hours of paid time off.

This method is a great way of calculating zero-hours holiday pay for employees who on average work the same number of hours each week.

Why it doesn’t always work

Although the 12.07% method is accurate in many cases, it may not necessarily comply with the Working Time Regulations in every case. It is unreliable and may not reflect the statutory minimum holiday entitlement of 5.6 weeks. Because of this, it is crucial to verify that the calculation of the holidays does not result in the worker receiving less than the statutory minimum holiday entitlement, which is common among seasonal zero-hours workers who only work for part of the year. 

To avoid this risk, we recommend that you calculate holiday based on the zero hours worker’s average weekly hours over a suitable reference period of 52 weeks.

Set up a reference period

Generally, holiday pay is calculated based on a worker’s standard weekly salary. However, as zero-hours workers do not have set work hours, they do not receive a regular salary. The solution? Using a reference period.

The holiday pay for these employees can be calculated based on their average weekly pay during a 52-week reference period.

When calculating the average weekly pay, the 52-week period should include only the weeks during which the worker worked. You can ignore the employee’s non-working weeks. Workers who have worked for a business for less than a year should have their reference period shortened to the length of their employment.

For employees who have been at your company for over a year but have not worked every week for the past 52 weeks, previous data can be used to create a 52-week reference period. However, it cannot go back more than 104 weeks.

What about annual salary as a reference?

Holiday pay for zero-hours contract workers can not be calculated as 12.07% of their annual salary. This is because it goes against the Working Time Regulations 1998. Because zero-hours work tends to be irregular, calculating holiday pay this way can sometimes result in the worker receiving less than the statutory minimum holiday pay, which is an illegal deduction from his or her wages.

Or use an actual calculator to finish

If either of the two methods described above doesn’t work well for you, the UK government also provides a holiday entitlement calculator for calculating holiday pay for workers who work irregular hours, such as zero-hour workers. You can use this tool to calculate holiday entitlement for:

• a full year
• part of a year, if your job started or finished halfway through the year.

This method is the easiest, most secure, and fastest way to calculate zero-hours contract holiday pay for your employees.

Snigdha Gupta

An avid writer and aspiring marketer, Snigdha is a student at Concordia University’s John Molson School of Business.