Calculating holiday pay has never been a simple exercise for every employer. Where employees receive commission, overtime or other variable payments, arriving at the correct figure can involve careful judgement as well as accurate payroll processes. However, since 6 April 2026, the challenge has become broader than calculation alone.
The Employment Rights Act 2025 now requires employers to keep adequate records demonstrating compliance with their statutory obligations relating to annual leave and holiday pay. That means employers should be thinking not only about whether they are paying the right amount, but whether they could evidence that fact if challenged months or even years later.
A recent Employment Tribunal decision involving Nuffield Health provides a useful illustration of why that distinction matters. Although Littlewood v Nuffield Health was not solely a holiday pay case, one aspect of the judgment demonstrates how difficult it can become to defend an employer’s position when the evidence supporting its holiday pay calculations does not withstand scrutiny.
Holiday pay calculations can drift over time
The legal principles governing holiday pay are well established. Workers should receive their normal remuneration while taking statutory annual leave, ensuring they are not discouraged from taking holiday because doing so would leave them financially worse off.
For employees who work fixed hours for a fixed salary, applying that principle is usually straightforward. The position becomes more complicated where earnings vary because of commission, overtime, allowances or other payments that regularly form part of an employee’s income.
In those circumstances, holiday pay may need to include more than basic salary. For workers with variable pay, employers will generally calculate holiday pay using a 52-week reference period based on the previous 52 paid weeks. Depending on the circumstances, that calculation may need to take account of contractual overtime, regular voluntary overtime, commission and other payments intrinsically linked to the work performed.
Many employers understand those principles. The greater challenge is ensuring they continue to be applied consistently over time.
Working patterns change. New commission arrangements are introduced. Employees begin working regular overtime that they did not previously undertake. Payroll software continues processing payments in exactly the way it was originally configured unless somebody tells it otherwise. Unless holiday pay arrangements are reviewed periodically, the methodology can gradually fall out of step with the reality of how employees are paid.
What does Littlewood tell employers?
Littlewood v Nuffield Health has attracted attention because of the tribunal’s overall award of almost £149,000. While the claim involved a number of employment issues beyond holiday pay, one aspect of the judgment provides a valuable lesson for employers.
The claimant challenged the way her holiday pay had been calculated and produced detailed evidence explaining what she believed she was owed. The employer, meanwhile, encountered significant evidential difficulties during the proceedings. The tribunal recorded failures to comply with aspects of its case management directions, the employer called no witnesses at the remedy hearing and ultimately struggled to substantiate parts of its position. Against that background, the tribunal accepted significant elements of the claimant’s evidence.
The case does not change the legal rules governing holiday pay. Its significance lies elsewhere. It demonstrates how quickly an employer’s position can weaken if it cannot clearly explain how holiday pay has been calculated or produce records that support those calculations. At a time when employers are under a statutory duty to keep adequate holiday pay records, that is a lesson worth paying attention to.
Why the Employment Rights Act 2025 matters
The new record-keeping duty introduced by the Employment Rights Act 2025 makes that evidential point even more significant.
Since April 2026, employers have been required to keep adequate records demonstrating compliance with their obligations relating to statutory annual leave and holiday pay. The legislation does not prescribe a particular format, allowing employers flexibility in how records are maintained. What matters is that the records are sufficient to demonstrate compliance and are likely to require retention for six years. .
For many organisations, this represents a subtle but important change in emphasis. Historically, employers have often focused on whether payroll produced the correct payment. Increasingly, they should also consider whether they could demonstrate, years later, how that payment was calculated and why the methodology adopted was correct.
That question becomes particularly relevant where responsibility for holiday pay is shared across HR, payroll, finance and line management. An overtime pattern agreed by a manager, a revised commission scheme introduced by the sales team or a change in payroll software can all have implications for holiday pay. If those changes are not reflected consistently across the organisation’s systems and records, defending historic calculations may become unnecessarily difficult.
Is it time to review your arrangements?
For many employers, holiday pay is a process that runs quietly in the background until a question is raised. The introduction of the new record-keeping duty provides a useful opportunity to review whether existing arrangements remain fit for purpose.
That review should go beyond checking the payroll calculation itself. Employers should consider whether their holiday pay methodology reflects current legal requirements, whether changes to working practices have been incorporated into that methodology and whether the records they retain would enable them to explain their approach if challenged.
It is also worth considering how clearly responsibilities are defined within the organisation. HR, payroll and operational managers may each hold part of the information needed to calculate holiday pay correctly. Ensuring those functions work together, and that records tell a consistent story, can significantly reduce the risk of disputes arising later.
Employers should also ask themselves some practical questions. When was the last time holiday pay calculations were reviewed? If overtime patterns or commission arrangements have changed, has the methodology changed with them? If an employee challenged their holiday pay tomorrow, could the business confidently explain every figure and produce the records to support it?
Looking beyond the numbers
The law governing holiday pay has developed over many years and will continue to evolve. The greater challenge for many employers is not understanding the legal principles but applying them consistently and retaining evidence that demonstrates they have done so.
The combination of the Employment Rights Act 2025 and the lessons from Littlewood provides a timely reminder that holiday pay should not be viewed simply as a payroll function. It is also a matter of governance, record-keeping and risk management.
Employers who periodically review their methodology, ensure records are complete and can clearly explain how holiday pay has been calculated will be in a far stronger position if their approach is ever questioned.
