Calculating holiday pay for zero hours staff is one of the most common – and misunderstood – challenges in HR and payroll. With hours varying week by week, how can you ensure every worker receives their full legal entitlement? And how do you stay compliant with evolving rules in the UK?
This guide covers everything you need to know about zero hours holiday pay — including tips on how to calculate it correctly — to help you apply the right formula, avoid costly errors and treat your workforce fairly.
Understanding zero hours holiday pay
When managing zero hours contracts, one of the most technical aspects is holiday pay. Because there’s no fixed schedule, entitlement must be calculated based on the hours actually worked. For HR and payroll teams, this means applying specific legal rules — including reference periods, average pay rates, and accrual methods — to avoid underpayment and ensure compliance.
What is a zero hours contract?
A zero hours contract is a work agreement where no set hours are guaranteed. The employer offers shifts as needed, and the worker may accept or decline them. These contracts are common in retail, hospitality, care, and events — sectors with fluctuating demand.
Despite the lack of fixed hours, zero hours workers are entitled to core employment rights, including paid holiday, sick pay (if eligible), and rest breaks.
Why does holiday pay apply to zero hours staff?
Under the Working Time Regulations 1998, every worker in the UK is entitled to a minimum of 5.6 weeks’ paid annual leave — regardless of their contract type. This includes part-time, casual, and zero hours workers.
Since zero hours staff don’t have a regular schedule, holiday entitlement is calculated based on actual hours worked. The key principle is fairness: workers should not lose out on paid leave simply because their hours vary.
How does UK law define holiday pay rights?
The law states that holiday pay must reflect normal remuneration — not just basic pay. For zero hours workers, this means averaging earnings over a 52-week reference period, excluding weeks with no pay.
This ensures that holiday pay mirrors real earnings — including overtime and variable pay.
Employers must keep accurate records to support calculations, and provide payslip transparency to avoid legal disputes.
How to calculate holiday pay for zero hours contracts
There’s more than one way to calculate holiday pay for zero hours contracts — but all methods must align with UK legal standards and reflect actual earnings. The right approach depends on your payroll software, contract wording and whether pay is issued weekly or monthly.
Using the 12.07% formula
Historically, many employers have used the 12.07% method to calculate leave entitlement.
This is based on the logic that 5.6 weeks of annual leave equals 12.07% of a full-time working year (46.4 weeks):
Holiday pay = Total hours worked × 12.07% × hourly rate
Example: A zero hours worker completes 100 hours in a month at £12/hour.
→ 100 × 12.07% = 12.07 hours of paid leave
→ 12.07 × £12 = £144.84 holiday pay
While still widely used, the 12.07% method has been challenged in UK courts and should only be applied when leave is taken as time off, not as rolled-up pay.
Rolled-up holiday pay explained
Rolled-up holiday pay means including an additional percentage (usually 12.07%) on top of the hourly wage instead of paying holiday separately when leave is taken.
This practice was declared unlawful in earlier case law but has since seen limited acceptance — provided the rolled-up amount is clearly itemised on the payslip and workers are still encouraged to take time off.
If used, it must be:
- Transparent and agreed in writing
- Separated from base pay in payslips
- Not a substitute for actual rest
Kelio’s payroll integration allows both methods — with full payslip breakdowns to avoid legal risk.
Worked hours versus reference-period calculations
From April 2020, UK law requires employers to base holiday pay on the average weekly pay over the last 52 paid weeks. This reference period excludes weeks where no pay was received.
This method is legally preferred over the 12.07% approach for long-term or regularly scheduled zero hours workers. It better reflects real earnings and avoids underpayment in months with overtime or variable shift lengths.
For HR teams, this means maintaining accurate records of:
- Hours worked
- Pay received
- Unpaid weeks (to be skipped in the average)
UK zero hours holiday pay rules in 2025
Holiday pay rules for zero hours contracts continue to evolve. In 2025, HR and payroll teams must align with recent reforms and anticipate upcoming changes under employment law updates.
Updates from April 2024 reforms
From April 2024, new government guidance clarified:
- The reference period remains 52 worked weeks, not calendar weeks
- Employers must exclude weeks with no pay from holiday pay calculations
- Rolled-up holiday pay is permitted under certain conditions — mainly for irregular hour and part-year workers — if clearly separated on the payslip
This reinstated a lawful pathway for using the 12.07% method, but only in specific contexts and with strict payslip transparency.
Future changes under the Employment Rights Bill
The Employment Rights Bill, expected to advance in late 2025, may introduce further obligations, including:
- Mandatory right to request a predictable working pattern after 26 weeks
- Stronger enforcement around accurate holiday pay records
- Expanded tribunal access for workers disputing holiday pay amounts
These measures aim to reduce exploitation and provide zero hours workers with greater predictability — without banning flexible contracts outright.
Payslip transparency and legal requirements
To stay compliant, payslips must clearly show:
- Hours worked (if pay varies)
- Any holiday pay paid separately or rolled up
- Total gross pay, with breakdowns for holiday accrual if applicable
Lack of clarity on payslips is a common source of HMRC queries and tribunal claims. HR systems like Kelio automate payslip generation with full breakdowns to support audit trails and protect employers.
Practical examples and case studies
Applying holiday pay rules in real situations helps clarify how different methods work — and where employers commonly get it wrong.
Worked example: monthly hours
A zero hours employee works the following hours in May:
- Week 1: 20h
- Week 2: 18h
- Week 3: 15h
- Week 4: 17h
→ Total: 70 hours at £11/hour
Using 12.07% method:
Holiday accrued = 70 × 12.07% = 8.45 hours
Holiday pay = 8.45 × £11 = £92.95
Alternatively, using the 52-week average method, you’d calculate average weekly pay based on the last 52 weeks where the employee was paid — which is more complex but may reflect bonuses, overtime, or seasonal peaks.
Common mistakes from employers
- Applying the 12.07% method and offering rolled-up pay (double-counting)
- Including unpaid weeks in the 52-week reference period
- Failing to separate holiday pay on payslips
- Assuming zero hours workers aren’t entitled to paid leave
These errors can trigger back-pay claims and expose the business to fines.
Lessons from real disputes
In multiple UK tribunal cases, employers have been ordered to repay under-calculated holiday pay due to:
- Inadequate record-keeping
- Ambiguous contracts
- Unclear payslip breakdowns
Case law highlights the importance of transparency, consistency, and contract clarity — all of which can be reinforced with workforce management tools like Kelio.
Employer compliance checklist
Staying compliant with holiday pay rules for zero hours contracts requires clear documentation, accurate tracking, and consistent communication.
Here’s what every HR team should have in place:
Contract wording and policies
- Clearly state the worker’s status (employee or worker)
- Specify holiday entitlement and calculation method
- Confirm whether holiday pay is paid when leave is taken or rolled up
Review contracts annually to ensure alignment with legal updates.
Record keeping best practices
- Log all hours worked and pay earned
- Flag unpaid weeks in payroll systems
- Store historical records for at least two full tax years
These records are essential for audits, disputes, or HMRC reviews.
Employee communications
- Explain how holiday pay is calculated during onboarding
- Provide payslips with holiday pay clearly itemised
- Make holiday policies easily accessible (intranet, HR portal)
A well-informed workforce reduces misunderstandings and improves trust — especially among flexible staff.
Discover Kelio Workforce Management Solutions
Kelio simplifies holiday pay management for zero hours staff with:
- Precise time tracking software
- Automated, compliant holiday pay calculations
- Clear payslips and HR reporting tools
Stay accurate, transparent and fully compliant — even with complex, flexible contracts.
