Ask a room of small business owners what holiday entitlement their staff have and most will answer confidently: "28 days including bank holidays." Ask them how holiday pay is calculated for their part-time or variable-hours staff and the room goes quiet. Holiday pay is where good employers get caught — not because they begrudge the time off, but because the calculation rules are more detailed than anyone expects, and the rules changed significantly for leave years starting from April 2024.

The baseline: what everyone must get right

Under the Working Time Regulations 1998, almost all workers are entitled to 5.6 weeks' paid annual leave per leave year — 28 days for a full-time, five-day-a-week worker. Employers can include bank holidays within that figure (there are usually eight in England and Wales) provided the contract says so. Part-time workers get the same 5.6 weeks pro-rated — a three-day-a-week worker gets 16.8 days, and the law does not round down.

Three baseline traps catch people immediately:

1. Forgetting that "worker" is wider than "employee." Many of your casuals and some of your contractors may legally be workers with holiday rights, whatever their contract calls them.
2. Accrual from day one. Holiday accrues from the first day of employment — roughly a twelfth of the annual entitlement per month in year one. A leaver at month four is owed payment for accrued untaken holiday.
3. Pay on termination. Accrued but untaken holiday must be paid when employment ends. There is no lawful way to forfeit it.

Trap one: rolled-up holiday pay

Rolled-up pay — adding a percentage on top of hourly pay instead of paying when leave is taken — was unlawful for everyone for years, following the European Court's decision in Robinson-Steele v RD Retail Services (2006). That changed with the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023: for leave years beginning on or after 1 April 2024, rolled-up holiday pay is lawful — but only for irregular-hours and part-year workers, calculated at 12.07 per cent of pay in each pay period, and shown as a separate line on the payslip.

The traps:

• Using rolled-up pay for regular-hours staff remains unlawful. If your administrator, your shop manager or anyone on fixed hours has "holiday included" in their hourly rate, you have an unlawful deduction problem building up.
• Getting the worker category wrong. "Irregular hours" means genuinely variable paid hours in each pay period; "part-year" means periods of at least a week with no work and no pay. A term-time worker on a permanent contract may not qualify; check the definitions in the GOV.UK holiday entitlement guidance before applying 12.07 per cent to anyone.
• Forgetting the human cost even where lawful: rolled-up pay means nobody is paid when they actually rest, and some staff simply stop taking leave. That creates a working-time health-and-safety exposure you still own.

Trap two: the wrong pay calculation

Holiday pay is not basic pay. A week of statutory holiday must be paid at the worker's normal remuneration, which includes regular overtime (even voluntary overtime, if sufficiently regular — the principle from Bear Scotland v Fulton (2014) and later cases), commission, and certain allowances.

For workers with variable pay, the reference period is now 52 weeks (increased from 12 weeks by the Employment Rights (Employment Particulars and Paid Annual Leave) (Amendment) Regulations 2018): you average pay over the last 52 weeks in which the worker was actually paid, looking back up to 104 weeks if necessary. Traps here:

• Paying basic salary only to staff whose earnings are mostly commission or overtime — a systematic underpayment that multiplies across every holiday taken.
• Averaging across weeks with no pay, which drags the rate below normal remuneration.
• Ignoring the two-tier structure: the first four weeks of leave carry the "normal remuneration" standard; the extra 1.6 weeks can lawfully be paid at basic rate — but only if your contract and payroll genuinely distinguish them. Most small employers sensibly pay one correct rate across all 5.6 weeks rather than run two calculations.

Trap three: carry-over and "use it or lose it"

The default rule is that statutory holiday must be taken in the leave year — but the exceptions are where employers stumble:

• Sickness: a worker who cannot take leave because of sickness can carry over up to four weeks, usable within 18 months of the end of the leave year.
• Family leave: leave untaken because of maternity, adoption or shared parental leave carries over into the next year — the full 5.6 weeks.
• Employer silence: where the employer fails to give workers a reasonable opportunity to take leave or to warn them it will be lost, carry-over can be required. A "use it or lose it" policy only works if you actually nudge people to use it — keep the emails.

The 2023 Regulations codified much of this and also confirmed COVID carry-over rules expired from 1 January 2024. The practical fix is simple: track leave, remind people mid-year, and record the reminders.

Holiday pay self-audit checklist

• □ Every worker category mapped: employee, worker, genuinely self-employed
• □ All staff getting at least 5.6 weeks pro-rated, from day one
• □ Rolled-up pay used only for genuine irregular-hours or part-year workers, at 12.07 per cent, shown separately on payslips
• □ Holiday pay includes regular overtime, commission and applicable allowances
• □ Variable pay averaged over the correct 52-week reference period
• □ Carry-over rules applied for sickness and family leave
• □ Mid-year "take your leave" reminders sent and kept
• □ Accrued holiday paid correctly on every leaver
• □ Leave-year dates, accrual method and payment method stated in contracts

The practical takeaway

Holiday pay errors are quiet. Nothing happens for years, then a leaver or an HMRC check surfaces a systematic underpayment going back across the whole workforce — holiday pay claims can reach back two years in deduction claims, and longer in practice where the error is structural. An hour spent auditing how you calculate it now is the cheapest insurance in employment law.

If you want your holiday pay practice checked against the current rules, book a discovery call with The People Powered at start a conversation with The People Powered.

This article is general guidance for employers, not legal advice on a specific case.