How to manage holiday pay for zero hours contract workers?

Managing statutory leave and holiday pay for irregular staff remains a critical yet complex task for growing businesses navigating the evolving regulatory landscape in the United Kingdom, particularly when managing zero hour contracts where hours fluctuate significantly.

What is a zero hours contract?

A zero hours contract is a casual type of employment arrangement where the employer has no legal obligation to provide a set number of hours. Consequently, the worker is not obliged to accept the work offered by the employer. This lack of ‘mutuality of obligation’ distinguishes it from standard contracts.

A zero hours contract offers flexibility, allowing businesses to respond to fluctuating demand, while giving staff the freedom to work around other commitments. Commonly found in sectors including hospitality, healthcare and the gig economy, these contracts do not guarantee a minimum income. However, the legal definition of ‘worker’ ensures that individuals on these contracts still hold specific employment rights.

As we look towards the 2026/27 tax year, the scrutiny on these contracts has intensified. The focus is now on ensuring they are used fairly, rather than as a means to avoid employer obligations regarding holiday pay and conditions.

What rights do zero hours workers have under UK law?

Understanding the distinction between an ‘employee’ and a ‘worker’ is vital for compliance. While all employees are workers, not all workers are employees. Rights are derived from this employment status, it’s not just about the specific label on the employment contract.

What are the employment status and statutory protections for zero hours workers?

Most people on a zero hours contract are classified as ‘workers’, although some may be legally deemed employees or self-employed depending on the practical reality of the working relationship.

As ‘workers’, they are entitled to core statutory protections under UK employment law. These include the National Minimum Wage, protection against unlawful discrimination, and, crucially, holiday pay.

If the individual is classified as an ‘employee’, their rights extend to unfair dismissal protection, redundancy pay, and statutory minimum notice periods. Therefore, understanding the employment status of those you pay for work is a fundamental step in classifying your staff correctly and ensuring compliance.

What does the right to request predictable hours mean?

Recent legislative shifts have focused on giving workers more security. In 2026, most likely from April 2026, eligible workers who have worked regular hours over a fixed period will have the legal right to request a contract that reflects their actual working hours. This will reduce the uncertainty inherent in zero hours arrangements. Thus, it is vital for HR managers to track the total time worked in order to anticipate such requests.

Calculating annual leave for your staff

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How does holiday entitlement work for zero hours contract workers?

Every worker in the UK is entitled to 5.6 weeks of paid holiday per year, including zero hours contract and irregular hours workers.

For those with fixed hours over the year, the calculation is straightforward. However, for a zero hours contract, the calculation is on a pro-rata basis to reflect the time actually worked.

How do you calculate the statutory 5.6 weeks for zero hours workers?

Under the Working Time Regulations, zero hours contract and irregular hours workers accrue leave based on their service. This ensures that a casual worker is not disadvantaged compared to a full-time counterpart.

The holiday pay entitlement is effectively a pro-rata pot of hours or days that builds up over the pay period.

It is a statutory requirement that this leave is paid, preventing employers from simply offering unpaid time off.

Summary of worker rights by status

To help you visualise the differences, here is a summary of the rights of different categories of workers:

Note that, currently, to qualify for SSP, workers must earn at least the Lower Earnings Limit (£125 per week in 2025/26), and be ill for four consecutive days. From April 2026, these specific barriers are set to be removed, meaning all workers will be entitled to sick pay from their first day of illness, regardless of their earnings, including zero hours contract workers.

What methods can you use to calculate holiday pay?

Calculating the correct rate and total payment can seem daunting. Fortunately, recent reforms have simplified the method for employers. There are two primary approaches currently sanctioned for use in the UK: the accrual method, and rolled-up holiday pay.

What is the 12.07% accrual method and how does it work?

The most common method for calculating leave for zero hours and irregular hours workers is the 12.07% rule. This figure is derived from the standard 5.6 weeks of holiday divided by the 46.4 working weeks remaining in a year (52 weeks - 5.6 weeks).

Therefore, for every hour a person works, they accrue 12.07% of that hour as holiday entitlement. This system provides a transparent mechanism whereby accrual tracks working patterns directly. For example, if a worker puts in 100 hours in a month, then they accumulate roughly 12 hours of leave.

When the worker decides to take a paid leave, they will then be paid at their average hourly rate. This ensures the value of their holiday pay reflects their recent earnings.

Is rolled-up holiday pay lawful in 2026?

Previously considered unlawful, rolled-up holiday pay was reinstated for zero hours and irregular hours workers for leave years beginning on or after 1st April 2024.

Rolled-up holiday pay allows employers to include an additional pay amount with every payslip to cover holiday pay, rather than paying it only when leave is taken.

The calculation involves adding 12.07% to the worker’s total pay for the pay period. This must be clearly itemised on the payslip as ‘holiday pay’ to avoid any confusion. While this improves cash flow transparency for the worker, employers must still ensure staff take their physical leave for health and safety reasons.

How do accrual vs rolled-up holiday pay compare?

Practical examples on how to calculate holiday pay correctly

Let’s look at some practical examples to clarify just how these numbers work in a real-world scenario.

How should you handle statutory leave and the 52-week reference period?

When a worker is on statutory leave, like sick leave, they continue to accrue holiday entitlement. For zero hours workers, you must calculate this based on their average weekly hours over a 52-week reference period.

You do this by looking back at the weeks they worked, ignoring weeks where no remuneration was earned, in order to find the average. This will ensure that their holiday pay reflects a fair rate of pay, even if their recent hours have been lower than usual.

This average must include overtime and commissions, ensuring the calculation represents their normal remuneration. It is important to note that you cannot strictly use the last few weeks if they were not worked, you must go back further to find weeks where actual work was performed.

What are common compliance pitfalls for employers?

Even with the best intentions, it is easy to fall foul of the strict regulations. A common mistake is miscalculating the hourly rate by excluding overtime or commissions from the earnings data. For example, if a worker regularly works overtime, this must be reflected in their holiday payment to ensure fair treatment.

Another frequent issue is failing to update zero hour contracts. As UK law evolves, employment contracts must accurately reflect the reality of the working relationship. Failing to do so can lead to expensive disputes over entitlement, particularly if the individual’s work pattern has become regular over time. Always double-check your calculation methods against the latest government guidance.

Why is automated software essential for SMEs?

Manual calculations for a growing workforce are prone to error. Spreadsheets often break when regulations change, such as the adjustments expected in the 2026 budget regarding National Insurance, or minimum wage thresholds.

One missed week or incorrect formula can lead to non-compliance, tribunal risks, and unhappy staff. Furthermore, tracking the 52-week reference period for holiday pay average calculations is time-consuming without automation.

Adopting the best payroll software helps automate these complex tasks and calculate pay correctly. Such a robust solution will automatically update with the latest regulations and HMRC compliant rules, ensuring that whether you use the accrual method or rolled-up pay, the numbers are spot on. This allows business leaders to focus on growth rather than administrative formatting, as it acts much like an internal compliance officer, flagging issues before they become problems.

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