Don't let holiday pay calculations get the best of you. We're here to cut through the confusion. Whether you're an employer or an employee, this guide breaks down everything you need to know about holiday pay in the UK, from who’s eligible to how to calculate it.
What is holiday pay?
Holiday pay is the compensation a worker receives when they take paid annual leave. It's a fundamental part of UK employment law, embedded within the Working Time Regulations 1998. The government enacted these regulations to ensure that all workers maintain a healthy work-life balance without losing their financial stability during their time off.
It's an employer's legal responsibility to provide 5.6 weeks of paid holidays for a full-time employee based in the UK. Failure to adhere to these regulations can result in severe legal and financial consequences, including potential claims at an employment tribunal.
Who’s eligible for holiday pay?
An essential aspect of holiday pay is understanding who is entitled to it. In the UK, the law states that all 'workers' are eligible for holiday pay. This term includes full-time, part-time, agency, and casual workers. In other words, the vast majority of people who carry out work for a company, organisation, or individual are likely to be entitled to holiday pay.
Who isn’t entitled to holiday pay?
The term 'worker' does not include self-employed individuals or those who run their own businesses, unless they are deemed to be workers under the specific context of the legislation.
This distinction can sometimes be a grey area, so it's always advisable for businesses to seek legal advice if they are unsure.
How do holiday pay entitlements work?
Holiday pay entitlements in the UK vary depending on the worker's employment status. Full-time workers are entitled to a minimum of 5.6 weeks of paid annual leave, which equates to 28 days for someone working five days a week.
However, part-time workers' entitlement is calculated on a pro-rata basis. This means their holiday entitlement is proportionate to the number of days or hours they work each week. For instance, if someone works three days a week, their leave entitlement would be 16.8 days of paid holiday.
Interestingly, even workers on zero-hours contracts have holiday rights. Their holiday pay is calculated as the average of the number of hours they’ve worked for the past 52 weeks.
You can read more about how to calculate holiday entitlements for part-time employees and workers in our other guide.
How to calculate holiday pay
The process of calculating holiday pay in the UK can vary depending on the employee's working schedule. For full-time employees who typically work 5 days a week, they're entitled to at least 28 days (or 5.6 weeks) of paid leave per year, which can also include bank holidays.
For part-time employees, their holiday entitlement is proportionate to the number of days they work in a week - a system known as 'pro-rata'. This ensures fairness, as their holiday entitlement is proportionate to their work schedule.
Now, let's break down the calculation process:
Step 1: Determine the worker's weekly pay. This is usually stated in their contract.
Step 2: Calculate the daily rate. You can do this by dividing the weekly pay by the number of days the employee works in a week.
Step 3: Determine the total annual holiday pay. You do this by multiplying the daily rate by the total annual leave entitlement (28 days for a full-time worker).
Example:
Suppose an employee works five days a week and earns £500 per week. The daily rate would be £100 (£500 divided by 5 days). Therefore, the total annual holiday pay for this employee would be £2,800 (£100 multiplied by 28 days).
This basic calculation ensures that during their time off, employees receive the same pay they would have gotten had they been working. It's important to note that various factors can affect this calculation, including the inclusion of overtime, commission and bonuses, which will be addressed later in this article.
Overtime and holiday pay
Some employers choose to pay their employees and workers at a higher rate if they work overtime. Some offer time off in lieu instead.
Acas state that holiday pay must be inclusive of overtime payments if a person has been paid regular overtime pay during the previous year.
For most employees, overtime pay must be included in at least 4 weeks of their holiday pay, as a minimum. But, for anyone working irregular hours, it must be factored into their full 5.6 weeks of holiday pay.
Bank holiday pay rate and employers’ legal obligations
There's no statutory right to paid leave specifically on bank holidays. Any entitlement to paid time off or extra pay (like time-and-a-half) for working on a bank holiday is contract-dependent.
For instance, if an employee's contract states they're entitled to 28 days of holiday excluding bank holidays, and they're asked to work on a bank holiday, they would be paid their usual rate unless their contract stipulates otherwise.
Holiday pay rates for fixed hours employees
For employees with fixed working hours, the holiday rate of pay is equivalent to a week's wage for each week of leave. It's as straightforward as multiplying their weekly hours by their hourly rate.
For example, let's say an employee works 40 hours a week at a rate of £15 per hour. Their weekly wage is £600. Thus, for a week of annual leave, they would receive the same £600.
Holiday pay for hourly employees
For employees whose hours are not set and fluctuate from week to week, holiday pay is determined by averaging their hours worked over the preceding 52 weeks, inclusive of any overtime.
It's crucial to note that the Employment Rights Act 1996 stipulates that employers must include regular overtime, commission, or bonuses in this calculation. This is to ensure workers are not financially disadvantaged when taking annual leave.
Example:
Let's say an employee has worked the following hours over the last three weeks (to simplify, we're using three weeks instead of 52):
Week 1: 35 hours, no overtime, no commission
Week 2: 30 hours, plus 5 hours overtime, £50 commission
Week 3: 40 hours, no overtime, £100 commission
First, we calculate the total hours for each week, including overtime:
Week 1: 35 hours
Week 2: 35 hours (30 hours standard + 5 hours overtime)
Week 3: 40 hours
Next, we add the hours and divide by the number of weeks to get the average:(35+35+40) ÷ 3 = 36.67 hours
Now, let's calculate the average weekly pay. If the employee is paid £10 per hour, their weekly pay (excluding commission) for the three weeks would be:
Week 1: 35 hours x £10 = £350
Week 2: 35 hours x £10 = £350
Week 3: 40 hours x £10 = £400
We then add any commissions to the weekly pay:
Week 1: £350 (no commission)
Week 2: £350 + £50 commission = £400
Week 3: £400 + £100 commission = £500
Finally, we calculate the average weekly pay (including commission):
(£350 + £400 + £500) ÷ 3 = £416.67
This means, for a week of annual leave, the employee would be entitled to £416.67, representing the average weekly pay.
Holiday pay for workers without fixed hours or pay
Calculating holiday pay for workers on casual or irregular hours involves averaging the pay they received over the previous 52 weeks they were paid, just like for hourly employees.
Holiday pay for zero-hour and part-year contracts
In the case zero-hour contracts, casual workers still hold the right to a pro-rated amount of 5.6 weeks of holiday. To calculate, you'd average their weekly pay over the 52 weeks preceding the holiday, just like for hourly workers.
How do I check I've got the right amount of holiday pay?
Understanding your entitlement and how holiday pay is calculated is the first step in verifying your holiday pay. By comparing the amount on your payslip with your calculations, you can ensure you're receiving the correct amount. If there's a discrepancy, it's advisable to raise it with your employer or seek legal advice if necessary.
On your payslip, it should appear as a separate line item, distinguishing it from your regular pay. This transparency allows workers to ensure they are being paid correctly during their time off.
Wrapping up
Calculating holiday pay accurately is not just about legal compliance - it's also an integral part of fostering a happy, motivated workforce. With the insights from this guide, UK employers can navigate the complexities of holiday pay calculations and ensure fair remuneration for their employees. Remember, taking care of your employees is an investment in the health and future success of your company.
Image from Unsplash, published by upgradedpoints
