You might think holidays are straightforward, but in reality, they are not as straightforward as they at first appear. At Outsourcing HR, we often get asked, “How do I calculate holiday pay?” So, in this blog we’ve summarised some of the main areas you need to be aware of:
Statutory holiday entitlements
You need to be clear about when your holiday year runs in your organisation to ensure that you calculate the holiday allowance correctly. It typically runs from the 1st January until the 31 December. However, any other start date can be used. Your employee handbook or contract should detail this, along with the procedure for booking holidays.
All full-time employees are entitled to 5.6 weeks (28 days) of holiday leave a year, which includes an allowance for bank holidays. Any additional holiday entitlement is called contractual not statutory because statutory just refers to what employees are entitled to according to the law.
If you’ve got any part-time workers, they get exactly the same leave entitlement as full-timers, but allocated on a pro rata basis according to the hours they work.
Anyone working irregular hours, such as those on a zero hours contract or casual hours, is entitled to a paid time-off allowance for every hour they work. Their leave entitlement needs to be calculated individually according to the hours they work – this is explained below.
Holiday entitlement begins from an employee’s first day of employment. However, during an employee’s first year of employment, you can restrict their entitlement to 1/12th of their full leave entitlement for each month of service. This can be done to stop employees using all their holiday leave and then leaving the business. If you are going to enforce this, you should make it clear to employees in your handbook, contract or offer letter.
Although statutory annual leave can’t normally be carried over from one year to another, there are a few exceptions. These include situations where long-term sickness prevents an employee from taking leave, or maternity, adoption or parental leave have meant that employees have not been able to take leave. In these situations, the employee can carry any untaken leave over into the next leave year.
To work out how much leave someone should get you can use the holiday calculator that is on the government website (https://www.gov.uk/calculate-your-holiday-entitlement). This is set up to calculate statutory holiday entitlements. Alternatively, you can produce a chart that explains to employees how you calculate their allowance if you are offering more than the statutory entitlement.
Calculating holiday pay
Holiday pay is calculated based on a week’s pay. For anyone who has no normal working hours, such as those on a zero hours contract or a casual workers contract, their holiday pay needs to be calculated based on their preceding 12 weeks of pay. This however is set to change from 6 April 2020, when the reference period used to calculate holiday pay will change from 12 weeks to 52 weeks.
Basically, when you are not working and are on holiday, you should be paid the same amount as if you were working. Previously, a week’s pay used to be calculated to include basic pay and any compulsory overtime specified in an employment contract. However, through case law this has now changed to include payments for the following:
- Contractual, results-based commission (for other types of commission, the law is still unclear).
- Guaranteed, compulsory overtime.
- Non-guaranteed, compulsory overtime if this is regularly worked (irregular overtime is still unclear).
- Voluntary overtime, where this regularly occurs.
- Possibly performance bonuses (discretionary bonuses probably not; contractual bonuses probably yes).
- Possibly some allowances (e.g. travel allowances, travelling time payments, standby and on-call allowances too, that form part of ‘normal remuneration’).
Do note however that holiday pay does not need to include payment for:
- Benefits in kind such as pension, cars and health cover.
- Salary that is sacrificed through a salary sacrifice scheme.
So how should you calculate holiday pay now?
Any regular overtime and regular commission payment should be included in holiday pay calculations to prevent the risk of a successful “unlawful deductions from wages claim” against you. Remember, this is regular overtime, so overtime that is sporadic and does not form part of the employee’s “normal hours” and regular pay does not need to be included as part of their holiday pay.
Unless the contract states differently, for the first 20 days of leave, any commission linked to the performance of the role and any other allowances which are intrinsically linked to the performance of the role and any regular overtime or commission payment, need to be included in the payment for these days. For the remaining eight days, the requirement is only to pay the employee’s basic salary. However, you can of course pay these additional amounts for all leave if you wish.
It is vital to check the employment contract to see if there are any additional contractual annual leave of enhanced terms in relation to annual leave.
Contact Outsourcing HR for help with employee remuneration and benefits
Outsourcing HR can provide you with sound advice on employee remuneration and benefits, including holiday pay. For a no-obligation discussion, simply call 07894-546333 or email Margaret Keane.