Azets has highlighted that, since 6 April, employers must maintain accurate records of holiday entitlement and pay and retain them for six years, in line with National Minimum Wage records.

The changes coincide with the introduction of the government’s Fair Work Agency (FWA), which has powers to inspect workplaces, demand records and impose unlimited fines or criminal sanctions for non-compliance.

Holiday records must include annual entitlement, when leave is taken, what employees are paid for each period of leave and any holiday pay made in lieu when employment ends.

H-J Dobbie, head of HR consultancy at Azets, said the principle was simple, but the practical application was far more complicated.

“Typically, HR will deal with holiday entitlement calculations and payroll will deal with holiday pay,” she said.

“But with the new onerous responsibility requiring all the data to be in one place and easily accessible, it means HR and payroll will need to work more closely together than ever before.”

While holiday calculations are relatively straightforward for workers with fixed hours and fixed pay, and can be calculated using the percentage method for workers with variable hours and pay, the situation is more complex for employees with fixed hours but variable pay.

This includes workers who regularly receive overtime, allowances, commission or shift premiums.

“The calculation for these workers, based on the ‘calendar method’, is so complicated that employers often don’t know where to start,” Dobbie said.

Azets is identifying cases where workers have been underpaid because variable pay components, such as regular overtime and shift premiums, have not been included in holiday pay calculations.

Employers are particularly concerned about the potential cost of correcting historic underpayments, with some cases requiring payments going back as far as two years.

“I’m getting calls from bosses of well-run companies worried sick about falling foul of compliance through no fault of their own,” Dobbie said.

“They want to ensure staff are paid what they are owed, but the calculation method is so difficult for what appears to be the largest group of workers, that it leaves them exposed.”

The issue is further complicated because holiday pay must be calculated each time a worker takes leave, rather than as a single annual calculation. Many employees are paid monthly, while the calculation may require weekly data.

Dobbie said there was limited practical guidance available and that no payroll or HR system currently handles the 52-week calendar method effectively.

“It is also daft calling it the 52-week calendar method, as employers may have to go back up to 104 weeks to count sufficient weeks,” she said.

The rules are primarily designed to protect workers on fixed hours who receive variable elements of pay, including overtime, bonuses, commission and allowances, as well as holiday pay owed when employment ends.

“Few businesses are getting their heads around this 52-week calendar method,” Dobbie said. “They’re coming up with all sorts of weird and wonderful ways to calculate what they think the differences are, but the sums don’t add up.”

Employers that get holiday pay calculations wrong could face an FWA investigation, employment tribunal claims and compensation payments. Dobbie also warned that asking employees to give up holiday entitlement to cover staff shortages could create further financial liabilities.

Government research has highlighted the scale of the problem, estimating that 900,000 UK workers have holiday pay withheld each year, worth around £2.1 billion. Nearly 20% of minimum wage workers are also estimated to be underpaid.

The new requirements, dubbed “R-Day” (Records Day), mean all employers must centrally retain accurate records of holiday entitlement, holiday pay calculations and annual leave processed through payroll for six years.

Businesses are expected to have robust systems in place, so records are securely stored and easily accessible to authorised staff.

Azets previously warned that many businesses were unprepared for the changes.

“R-Day is a wake-up call. Employers need clear protocols for record access and ownership. If the FWA comes knocking and records are fragmented across HR and payroll, it becomes an admin emergency,” said Julie Gunnell, associate director – Growth Payroll at Azets.

She added that the legislation requires HR and payroll teams to work collaboratively and create a “single source of truth”, warning that businesses could otherwise face compliance failures and potential criminal prosecution.

According to the Office for National Statistics, there were 2.73 million VAT and/or PAYE businesses in the UK, indicating the potentially large number of employers affected.

The financial consequences of getting holiday pay wrong were highlighted by a recent employment tribunal case in which a long-serving former employee was awarded £391,942.77 before tax and National Insurance after his employer failed to pay holiday entitlement amounting to 827.25 days.