Annual holidays on fixed-term agreements
The entitlement to four weeks’ paid holiday after 12 months’ service is not always the best way to deal with holidays for short term employees.
If an employee is employed on a genuine fixed-term agreement for less than 12 months, they can agree that they will get 8% added to their gross weekly earnings (paid-as-you-earn) instead of taking annual holidays or getting paid out all of the 8% at the end of their term.
This should be included in their employment agreement, and the 8% should appear as a separate and identifiable amount on the employee’s pay slip. At the end of the fixed-term, the employee will have received all their pay for annual holidays and won’t get any additional payments or holidays. This reflects the fact that these employees are not expected to reach the date on which they qualify for annual holidays (ie 12 months).
If an employee is employed on one or more further genuine fixed-term agreements of less than 12 months in total with the same employer, the same arrangement for paid-as-you-earn holiday pay can be made, even when there is no break in employment, as long as the employer and employee agree in writing.
If an employee starts off on a fixed-term agreement with 8% added on to their gross weekly earnings and then later they get a permanent job with the same employer, the payment of the additional 8% annual holiday pay in the employee’s regular pay must stop.
The employee will become entitled to four weeks’ annual holidays one year after the final fixed-term period started, but because the employer has already paid the additional 8% annual holiday pay during the fixed-term period of employment, the pay for annual holidays is reduced by the amount already paid.
If an employment agreement is 12 months or is not a genuine fixed-term and an employer incorrectly pays annual holiday pay on a paid as you earn basis, after 12 months’ continuous employment, the employee will still become entitled to paid annual holidays, and any amount paid on a paid as you earn basis can’t be deducted from the employee’s annual holiday pay.
When fixed-term agreements are linked to targets like project completion, there can be a risk to the employer that the fixed-term will last 12 months or longer, and then the employee will become entitled to paid annual holidays, despite having already been paid on a paid-as-you-earn basis.
Therefore, paid-as-you-earn arrangements are not recommended where it is possible that the employment will last 12 months or longer.
You should look to clarify entitlements and renegotiate the relevant employment agreement as soon as it appears likely that a fixed term arrangement will unexpectedly last more than 12 months.
Irregular or changing work patterns or genuine casual employees
Where an employee is employed on a genuine casual basis, they have no expectation of ongoing employment and are employed on an as and when required basis.
If the employee’s employment pattern is so intermittent or irregular that it isn’t possible or practicable to attempt to provide 4 weeks’ paid annual holidays, the employee may be paid annual holiday pay with their regular pay (i.e. on a paid-as-you-earn basis) on the basis of not less than 8% of the employee’s gross weekly earnings.
- this can only be done if the employee agrees in their employment agreement, and
- the annual holiday pay is paid as an identifiable part of the employee’s pay (and on their payslip).
The employer should review the work pattern often to see if a regular cycle of work has developed. If this happens, the employer and employee should enter into a new employment agreement that provides for annual holidays to accumulate, and that removes the 8% payment. If a regular pattern of work has developed but the employer continues to pay the 8% annual holiday pay for 12 months or more, then the employee will become entitled to paid annual holidays, and any amount already paid on a paid-as-you-earn basis can’t be deducted.
Examples of genuine casual employment for the purposes of the Holidays Act 2003
- An employee who works occasionally to cover for sickness.
- A specialist tradesperson who is employed only when a particular process (such as repairing a broken machine) is required.