Calculating Holiday Pay and Entitlement

It’s holiday season which means you’re probably coming up against multiple annual leave requests and in some cases having to calculate (and ensure there’s enough) holiday and whether or not that employee is paid for that holiday. With a myriad of different working structures, contracts and conditions it can be tough to know if you’re getting things right.

Let’s get stuck in, crunch the numbers and make sure you’re set up for success.

Understanding Entitlement

Firstly there’s the legal requirement, under the Working Time Regulations 1998 full-time employees in the UK are entitled to  5.6 weeks of paid holiday per year. This typically translates to 28 days for someone working five days a week. This entitlement can include public holidays if you choose to include those as part of leave. (but please don’t this is beyond stingy)

Entitlement also includes any holidays that you choose to add on top of the minimum legal requirement.

If someone works on a part-time basis then calculate their entitlement based on the number of days they work per week. For example, if an employee works three days a week, their annual holiday entitlement would be 3 days x 5.6 (or whatever your allocated holiday entitlement for employees is)  = 16.8 days. 

Calculating Holiday Pay

Now let’s get to the payment bit, The method for calculating holiday pay varies based on the type of work an employee does which is where it can get a bit complicated. 

1. For Employees with Fixed Hours and Pay: If an employee works fixed hours and receives a regular salary, calculating holiday pay is straightforward. They will receive their normal weekly pay for each week of holiday taken.

2. For Employees with Variable Hours or Pay: For those with irregular working hours or pay, holiday pay is calculated based on their average pay over a 52-week reference period. If the employee hasn’t worked for a full 52 weeks, the period will be based on the weeks they have worked.

Stay with us now and maybe grab a calculator…

Let’s work through the steps of calculating holiday pay for an employee with variable hours or pay. 

1. Determine the Reference Period: Look at the last 52 weeks the employee worked, discounting any weeks where no earnings were received.

2. Calculate Average Weekly Earnings: Add up the total pay the employee received during the reference period and divide by the number of weeks worked (excluding unpaid weeks).
   
   

3. Multiply by the Number of Holiday Weeks: Multiply the average weekly earnings by the number of weeks of holiday entitlement.

For example, if an employee earned £18,000 over 48 weeks:

• Average weekly earnings = £18,000 / 48 = £375

• If they take a week’s holiday, they would receive £375 as holiday pay.

Handling Overtime and Commission

If an employee regularly earns overtime, commission, or bonuses, these should be included in the holiday pay calculation. The aim is to ensure the employee is not financially disadvantaged by taking time off.

Including Overtime and Commission:

• Regular Overtime: If overtime is a normal part of the job and not occasional, it should be included in the average earnings calculation.

• Commission and Bonuses: Regular and guaranteed bonuses or commissions should also be included.

Here are some real-life examples of where this comes into play

1. Term-Time Workers: Calculate their holiday entitlement proportionally, reflecting the actual weeks worked.

2. Casual Workers: Use the 52-week reference period to determine their average pay.

3. Leavers: If an employee leaves partway through the year, they are entitled to be paid for any unused holiday. Calculate this by pro-rating their annual entitlement to the part of the year they have worked.

What are your responsibilities as an employer?

You must ensure that holiday pay calculations are fair and comply with legal requirements. Make sure you: 

• Keep accurate records of hours worked and pay received.

• Regularly review and update payroll systems to reflect changes in legislation.

• Communicate clearly with employees about their holiday entitlements and how holiday pay is calculated.

If you’ve found calculating holiday pay and entitlement tricky you’re not on your own! But it is essential to get it right for you and your employees, a mistake can hit them or you in the pocket, create an admin headache or worst of all get you into a legal dispute.

Need support with holiday entitlement and pay? Give us a shout we’re here to help!