Pay-as-you-go holiday pay (8%): when it is lawful and when it is not

Pay-as-you-go holiday pay (the 8% approach) looks simple - and it is where the legal conditions are met. Where employers get this wrong, the usual outcome is expensive: the worker can still become entitled to 4 weeks annual holidays, and the employer may not be able to claw back the 8% already paid.

Holiday pay for casual workers

For an employer to pay 8% pay-as-you-go holiday pay, for employment that continues beyond a duration of 12 months there are rules that apply, otherwise the employee could become entitled to four weeks holiday pay regardless of being paid 8% with regular pay.

If an employer incorrectly pays holiday pay with an employee's regular pay and the entitlement arises, an employer is typically unable to recover holiday pay already paid as overpayments. An employer who does not strictly comply with the conditions of the Holidays Act 2003 for use of section 28 does so at its own, costly, peril.

Pay-as-you-go holiday pay

When annual holiday pay may be paid with employee's pay:

• The employee is either genuinely under a fixed-term employment agreement for less than 12 months; or works for the employer on a basis that is so intermittent or irregular that it is impracticable for the employer to provide the employee with 4 weeks' annual holidays.
• The employee agrees in his or her employment agreement.
• The annual holiday pay is paid as an identifiable component of the employee's pay
• The annual holiday pay is paid at a rate not less than eight percent of the employee's gross earnings.

These conditions are all conjunctive which means that all of these conditions have to be met. If not and an employee becomes entitled to holidays after working a period of 12 months during their employment, then the employee can make a claim for holiday pay.