Managing Annualised Hours Contracts at work 

Managing Annualised Hours Contracts at work

Annualised hours are a specific kind of contract that calculates pay based on a whole year of work, as opposed to a week or month. These contracts set expectations that an Employee will work a specific number of hours a year, but those hours will not be the same month-to-month or even week-to-week. Those hours will be split into ‘core’ or ‘rostered’ hours, and ‘reserve’ hours to give you flexibility over the amount of work required.

These types of flexible working contracts are popular, especially amongst Businesses that experience peaks and troughs in demand. According to the Chartered Institute of Personnel and Development (CIPD), the industries utilising the most annualised workers are:


  • health and social care (320,945 workers);
  • education (250,519 workers);
  • wholesale, retail, and vehicular repair (238,314 workers);
  • public admin and defence (169,268 workers);
  • and manufacturing (163,196 workers)


Annualised workers as a whole make up 6.4% of the workforce.


Whereas a standard contract may result in a Business needing to pay their Employees large amounts of overtime, annualised hours reduce costs. They also provide an Employee with a great deal more flexibility and promote work-life balance.



Are annualised hours Contracts beneficial to my business?

Most commonly, an annualised hour Contract totals up the number of contracted hours an Employe is expected to work in a year. This can differ for different groups, departments, or individuals.


These types of Contracts are commonly made up of rostered hours and reserve hours. Rostered hours should be set in advance using a roster method that as an Employer you would circulate to your Employee/s, and you would use the rostered hours to cover normal working shifts.

When using reserve hours, your Employee may be required to work depending on demand typically, to cover for eventualities such as short-term sickness cover, holidays, peaks in production, and the event of emergencies. The ratio of rostered to reserve hours will depend on the Contract you agree with your Employee/s.


You can use one or both methods, annualised hours contracts might be made up of all rostered hours or all reserve hours. As an employer if you are considering using annualised hours contracts you should decide what would suit it best.

If you know in advance that you will need employees to work and when you should include in the rostered hours, this will provide clarity for both parties, this may not be possible if work is unpredictable, in this instance you would use reserve hours.

In most instances as an Employer, it is prudent to build an element of flexibility into Contracts, that way you can ensure that a balance of rostered and reserve hours can be used.



Should the terms be agreed upon with the Employee and how?

As an Employer you should make clear the terms upon which the Employee has agreed to work, this may mean ‘varying’ their Contract of Employment, they should agree to the change if they agree you should issue the relevant notice period and in writing, we urge that you speak to a  http://HR Consultant.


You should as with any change set out, the terms relating to pay, holiday, sickness, and other benefits, would also include:


  • how the Employee is to be paid
  • are employees to be paid in equal installments throughout the year or for hours actually worked during the relevant pay period
  • when can employees on annualised hours Contracts take annual leave
  • what are the pension and benefit variables
  • how should they notify their employer about sickness absence
  • how will the roster be communicated, including notice periods for rostered and reserve hours


How should I calculate Annual Leave and pay?

Annual leave entitlement causes much confusion at the best of times, in essence, your Employee’s entitlement to annual leave does not change, it would remain the same as a typical weekly Contract of Employment, however, you would state the entitlement in hours as opposed to days.

The decision should be mutually agreed upon, you can pay in twelve equal monthly instalments or only pay them for the hours they have actually worked.

Importantly, in the latter scenario, the Employee may end up receiving more money in one month and less in another, not only can it be unhelpful for your Employee, you must be careful that in a ‘month, you are paying less you are not in breach of National Minimum Wage legislation.



Are there any other matters to consider with Annual Leave?

In terms of holidays, and not to overcomplicate the matter, many Employers have been using ‘rolled up’ holiday pay, this is when an Employee who only works for part of the year so may have long periods where they are not in the workplace, it is commonplace in education, care and can be considered ‘term-time ‘or ‘peak time’ working.



In a high profile and recent case causing much controversy, the Court of Appeal, Brazel v Harpur Trust clarified that Employers must calculate holiday pay for Employees of this kind.

Before and up to the Court of Appeal decision, it had always been common for employers to pay their employees 12.07% of their annualised hours as holiday pay. This percentage figure had been calculated:

  • establish the number of working weeks in the year by deducting 5.6 weeks from 52 weeks to give 46.4 (5.6 weeks is the statutory annual leave entitlement therefore the EE is not working to accrue leave during this time)
  • divide 5.6 weeks by 46.4 to give the percentage of 12.07%


Mrs. Brazel worked for 32 weeks of the year, the Trust applied a calculation of 32/46.4 multiplied by 5.6 to give an annual leave entitlement of 3.86 weeks, paid at 12.07%.

In the case, the Court held that under the Working Time Regulations 1998, there was no provision to pro rata the amount of holiday entitlement to which a ‘part-year’ worker such as she was entitled. It held that she should not receive less than her entitlement simply because she does not work throughout the year, and she should be entitled to the full 28 days (5.6 weeks) per year just as full-year workers are, instead of 3.86 weeks.

Bizarrely, the Court held that the twelve-week period used to calculate average earnings for the purpose of calculating the rate of holiday pay should be extended where necessary, following section 224 (3) of the Employment Rights Act 1996. Meaning, if an employee does not earn money in one of the weeks of the twelve-week period, then that week is discounted, and the Employer should look further back to take into account of pay the employee did receive in previous weeks.


As an Employer should I have a policy to manage Annualised hours?

We would recommend you create a policy; you should create this bespoke to your business, it should set out your framework, and the way in which you will manage the process and procedure, and you should this out clearly for your Employees.

Below are just a few points you should consider:

  • pay, hours, annual leave, and benefits
  • how will you manage, and track hours, what if there are un-used hours throughout the year, end of or leavers/terminations
  • how you would roster, how the reserve would work, and what notice is to be provided
  • you should set out how the procedure will be managed, by who, when it will be reviewed
  • who to speak to if there is an issue, how to manage refusals, leading to consequences
  • if you are operating on-call, stand-by, and or emergency, roster how will this work, what will this look like, are there different processes, and have you taken a look at all considerations
  • you should consider reasonable adjustments under the Equality Act 2010


How can we help?

We are experts dealing with any HR and Employment Law matter, we can assist you with advice, guidance, and support, should you require policy writing we are experts in this area; you can contact one of our team today and we can assist you; contact us on 0333 0069489 or email us on: [email protected] 




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