Six Years of Holiday Pay Records, Six Months to Sue: What SMEs Must Now Keep

Two separate changes are landing on employers at roughly the same time, and together they make holiday pay one of the riskiest areas of compliance right now.

The first is a new record-keeping duty. Employers must now keep adequate records demonstrating compliance with holiday pay and entitlement rules, and those records need to be retained for six years. That's not a suggestion. If a claim comes in and you can't produce the paperwork, the tribunal isn't going to take your word for it.

The second change is the extension of employment tribunal time limits for most claims, expected to move from three months to six months around October 2026. That gives a former employee twice as long to think about bringing a claim, which in practice means your evidence needs to survive twice as long in someone's memory before it's even tested. Worth being precise here: this extension applies to most tribunal claims, but breach of contract claims in the tribunal have historically sat on their own three-month time limit, and nothing in the reforms changes that carve-out. Don't assume every claim type moves in step.

Put those two changes together and the maths is unforgiving. Six years of records, a claim window that's just doubled, and a new enforcement body actively looking for gaps. Most SMEs' current holiday records were never built to survive that level of scrutiny.

The classic failure point is rolled-up holiday pay and irregular hours staff. If you're still calculating holiday pay as a flat percentage added to hourly pay for casual or zero-hours workers without reference to their actual average earnings, that calculation has been legally contentious for years and is exactly the kind of thing a records audit will expose.

Before your next holiday year starts, get this in order.

• Clear accrual and carry-over records for every employee, not just full-time staff
• A documented, defensible method for calculating holiday pay for irregular hours and casual workers
• A filing system built to hold records for six years, not whatever your current payroll software happens to retain by default
• An audit trail covering leavers, so a departed employee's holiday history doesn't disappear from your systems the day they leave
• A template holiday pay statement you can hand to any employee who asks how their entitlement was calculated

If your holiday pay records wouldn't survive a claim brought in month five of a six-month window, now's the time to fix that, not after the letter arrives. Speak to Neathouse Partners on 0333 041 1094 or visit neathousepartners.com for a holiday pay audit.

For further reading  on pay check out our NMW Compliance Guide

For further reading check out our guide to Managing Absence