Holiday pay calculations
25 June 2018
This article was featured in the July - August 2018 issue of the magazine.
Jill Smith MCIPPdip, CIPP policy manager, covers the basic payroll procedures
We all love a good holiday but calculating holiday pay has become a minefield due to the complexities and issues. If the employees work a set number of hours and receive a fixed salary, calculating annual leave entitlement and holiday pay is relatively straightforward, but if staff have irregular hours, work overtime, or receive commissions or bonuses then the calculations can become quite tricky.
Though my intention is to keep it simple and focus on the basic procedures, the implications of case law cannot be excluded – and they are far from basic.
Entitlement
Every worker in the United Kingdom is entitled to paid annual leave in addition to the statutory bank holidays.
The law setting the UK annual leave entitlement is the Working Time Regulations 1998 (‘the Regulations’). An individual is generally classed as a worker if they have a contract of employment. Currently, workers are entitled to a minimum of 5.6 working weeks paid annual leave per year (known as ‘statutory leave or annual leave') which equates to 28 days of leave per year for someone who works a five-day week. Part-time workers are entitled to the same amount of holiday (pro rota) as full-time colleagues.
Workers are entitled to the following types of annual leave:
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a minimum of four weeks of paid annual leave under the Regulations, often referred to as ‘Regulation-13 leave’
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an additional 1.6 weeks paid annual leave under the Regulations, generally known as ‘additional leave’
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any additional entitlement provided for in the relevant agreement, often known as ‘contractual leave’.
‘Regulation-13 leave’ and ‘additional leave’ together make up ‘statutory leave’, which is usually included in the annual leave entitlement and will be set out in an employee’s written contract. However, legally ‘contractual leave’ means any leave in the contract over and above statutory leave.
There is no legal right to paid public holidays, but the worker’s contract should state if they are to be paid for these holidays. If paid, they can be counted as part of the statutory 5.6 weeks of holiday, but employers can provide them in addition, if they so choose.
Accrual
Once an employee starts work, details of holidays and holiday pay entitlement should be provided in the employee’s written contract, or a written statement of employment which is required by law and must be given to employees by the employer no later than two months after the start of employment. An employer must tell their employee the dates of their leave year as soon as they start working, for example, it might run from 1 January to 31 December or it could start from their first day at work.
As soon as an employee starts work they will start to accrue leave. The holiday entitlement is not affected by maternity, paternity or adoption leave. The employee still builds up or accrues holiday over these periods. GOV.UK has a holiday entitlement calculator to help work out what annual leave is due if an employee started part-way through the year and what leave someone has left if the employment is terminated (https://bit.ly/1picPiR).
If an employee starts their job part-way through a leave year, they are only entitled to part of their total annual leave for the current leave year which usually depends on how much of the year is left. When an employee leaves part-way during the leave year they will not have accrued the full annual leave entitlement, but they have a legal right to be paid for any leave due which has not been taken. If the employee has taken more holiday than they have accrued by the time they leave, then the difference can be deducted from the last salary, providing there is a contractual right to make deductions.
Case law dictates that a worker’s entitlement to holiday pay will continue to accrue during sick leave, regardless of whether this is paid or unpaid. If a worker is unable to take their annual leave in their current leave year because of sickness, they should be allowed to carry that annual leave over until they are able to take it, or they may choose to specify a period where they are sick but still wish to be paid annual leave at their usual annual leave rate. An employer must allow a worker to carry over a maximum of 20 of their 28 days of leave entitlement if the worker couldn’t take annual leave because they were off sick.
Calculating holiday pay
A week of leave should allow workers to be away from work for a week (i.e. it should be the same amount of time as their working week). If a worker does a five-day week, he or she is entitled to 28 days’ leave. However, for a worker who works six days a week the statutory entitlement is capped at 28 days. If they work a three-day week, then their overall entitlement will be 3 × 5.6 = 16.8 days.
Employers can also set the times that workers take their leave, for example for a summer or Christmas business shut down. There are also occasions where the employer can refuse to give leave at a certain time, but they cannot refuse to let workers take the leave at all.
The Regulations set a legal requirement for all annual leave to be paid at the same rate as working time: for example, one week’s pay for one week’s holiday. There are guidelines on GOV.UK on how a week’s pay is worked out and what should be included (https://bit.ly/29Jl1uw).
ACAS (the Advisory, Conciliation and Arbitration Service) states that several recent court judgments should be considered when calculating holiday pay for Regulation-13 leave.
As previously covered, in addition to the four weeks employees also receive a further 1.6 weeks of annual leave and some receive additional amounts as a part of their contracts too. Many employers choose to apply the judgments to this extra annual leave as well as the four weeks; though this is not a legal requirement it can help to keep processes simple and clear.
Overtime and commission
Case law dictates that all types of overtime should be included when calculating holiday pay:
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guaranteed overtime where the employer is obliged to offer the extra hours and the employee is obliged to accept them
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non-guaranteed overtime where the employer is not obliged to offer it but when they do the employee is obliged to accept it, and
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voluntary overtime where there is no obligation on either the employer or the employee and is worked regularly.
Overtime that is only worked on a genuinely occasional and infrequent basis does not have to be included. Currently there is no definition of what ‘occasional and infrequent basis’ means and until a decision has been made employers are not under an obligation to factor in this type of overtime.
Commission should be included. This is usually an amount of money a worker receives because of making sales and can make up some or all their earnings.
Working patterns
There are different rules for calculating holiday pay depending on the working patterns involved. For an employee who has set working hours which stay the same each week, then a week’s pay is the remuneration for a week of work.
Where employees do not have a set working time, but work different shifts spread over several weeks, resulting in a different number of working hours each week, their holiday pay would be calculated by taking their average weekly hours over the previous twelve weeks then multiplied by their average hourly pay for that period to give a week’s holiday pay.
If the worker does not have normal working hours and their pay differs from week to week, a week’s pay for purposes of holiday pay is the average pay received per week for the twelve weeks immediately before the day the holiday starts. This means that on each occasion the employee takes time off, their pay must be calculated using a new pay reference period resulting in a different amount of pay for different periods of annual leave.
Unacceptable practice
Employers may not lawfully pay employees in lieu of their holiday entitlement if it relates to the statutory leave. The only exception to this is when the employment terminates for any reason and the employee has not taken all the holidays they have accrued. If an employer offers more than 5.6 weeks of annual leave, they can agree separate arrangements for the extra leave.
Holiday pay should be paid for the time when annual leave is taken. An employer cannot include an amount for holiday pay in the hourly rate (known as ‘rolled-up holiday pay’). If a current contract still includes rolled-up pay, it needs to be re-negotiated.
This is by no means a definitive guide to calculating holiday pay – we would all love one of those to become available – but in the meantime government departments continue to work on updating guidance, as and when case law changes the rules.