How to calculate holiday pay: A complete guide for employers

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In theory, calculating holiday pay should be relatively straightforward. However, several tribunal decisions since 2014 mean employers should consider additional factors such as overtime and commission payments when considering an individual’s normal pay.

Employment case law is constantly changing, so employers must remain up to date and ensure the law is being applied correctly to avoid costly tribunal claims.

The basic principle when calculating holiday pay is that employees should receive the same pay during annual leave that they would have received had they been at work. Keep reading to learn about holiday entitlement and how to calculate holiday pay!

All employees are entitled to 5.6 weeks (28 days) of annual leave per year. This includes bank holidays. Of these 5.6 weeks, 20 days derive from European law, and eight are provided under UK law. (However, there is a current proposal to combine these elements, as part of the Government’s proposed retained EU employment law reforms).

Part-time employees are entitled to the same holiday on a pro-rata basis. A company can choose when their holiday year starts and ends; many choose to align this with the calendar year in January or the tax year in April.

If an employee joins the company partway through a holiday year, you should calculate their holiday entitlement on a pro-rata basis for the remainder of the year.

time employees that work regular hours won’t notice a difference in pay, whether they take annual leave or not. A week’s annual leave doesn’t usually change the amount of pay they receive at the end of the month. However, calculating average pay can become more complex when someone doesn’t work a fixed pattern. This is because they don’t receive the same pay each week.

But how do you calculate holiday pay in practice? One approach is to look back at a worker’s previous 52 paid weeks (referred to as the reference period). Using this reference period, employers can calculate what that individual should be paid for a week’s leave.
Since 6 April 2020, the reference period for calculating average pay increased from 12 weeks to 52 weeks.

Another way to approach it is by using rolled-up holiday pay.
On 8 November 2023, the Government announced proposed changes to the process for calculating holiday pay for employees who work irregular hours or have part-year contracts. Effective from 1 January 2024, employers are now able to use the ‘rolled-up holiday pay’ approach, which was stopped following the outcome of the Harpur Trust v Brazel case. This essentially means that it will be more straight forward for employers to calculate holiday pay. The change allows employers to pay their employees 12.07% of hours worked, instead of calculate an average using the 52 week reference period.

Regulation 16 of the Working Time Regulations 1998 (SI 1998/1833) requires workers to be paid at the rate of “a week’s pay” for each week of their statutory annual leave. Under the Employment Rights Act 1996, a week’s pay – in simple terms – is how much money an employee would be paid under their current employment contract if they worked their normal working hours for a week.
However, there are several extra considerations for employers which impact the calculation for statutory holiday pay during the four-week entitlement, specifically regarding overtime and commission payments. We’ll discuss these cases in more detail in the next section.
In summary, employees who take annual leave should not lose pay. They should continue to be paid as normal and suffer no disadvantage from taking a holiday. Otherwise, there would be an incentive for employees not to take their full holiday entitlement, and that would undermine the protection of the Working Time Directive.

  • Guaranteed overtime – overtime that is guaranteed according to the contract of employment.
  • Non guaranteed overtime – regular overtime that workers are required to work, even where the company is not contractually obliged to offer a minimum of overtime hours.
  • Voluntary overtime – overtime employers are not required to offer and individuals are not required to work.
  • Bonus payments – additional payments including attendance bonuses and productivity bonuses, for instance where employees meet or exceed targets.
  • Commission payments – Payments that are made to individuals on selling a certain amount of goods or services, which would have been earned during a period of annual leave.
  • Flying allowances – pilots flying time should be included.
  • Travelling-time allowances – there should be an allowance for time spent travelling if this is linked to the performance of normal duties.

A number of organisations have been required to review their approaches to holiday pay. This is due to the 2014 rulings and the decisions within the courts following these. In many cases, employees have been entitled to claim back pay.
There are currently some factors to consider when looking at whether an employee can claim for an underpayment. This includes:

Limitation period – there is a period for bringing claims for underpaid holiday and this is 3 months. Therefore an employee has 3 months from the last underpayment to raise a claim.

Series of deductions – However, as a result of the Supreme Court decision in relation to Chief Constable of the Police Service of Northern Ireland v Agnew, a series of deductions will no longer be broken if a gap of 3 months or more exists between deductions. Therefore, gaps between deductions are essentially irrelevant. Series of deductions can now be linked, despite being broken by periods of time, when considering all relevant circumstances, such as their frequency, size and impact.

Backdating claims – despite the gap between series of deductions being disregarded, there is still a backstop in place in the UK to prevent employees from claiming for unlawful deductions for the duration of their tenure. Employees can backdate claims for up to 2 years, after this, even if an employee had been underpaid beyond this, they could not claim it back.

If you are concerned, then it’s sensible to take steps to address these concerns. Firstly, review how much pay your employees are receiving during their holiday. This should be reflective of their normal remuneration.

Where holiday pay does not reflect normal pay, you should determine the correct amount of pay that should have been paid. Then, we recommend seeking advice on how best to approach the situation regarding potential back payments.

As employment case law is constantly evolving, employers are advised to stay updated on changes.

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