How to calculate holiday pay

In the midst of the pandemic and the introduction of furlough, an amendment to the Employment Rights Regulation 2018 was introduced in April 2020. New regulations were introduced regarding the calculation of holiday pay that impacts variably paid employees. Perhaps overlooked at the time by many employers, now is an important time to fully understand how holiday pay is calculated for variably paid employees.

A brief overview of holiday pay

Holiday pay is based upon the principle that an employee should not suffer financially for taking a holiday. Almost all employees – except self-employed – are legally entitled to 5.6 weeks’ paid holiday per year, and entitlement which was derived from the Working Time Regulations 1998.

The amount of pay that a worker receives for the holiday they claim is dependent on not only the number of hours they work but how they are paid for these hours too.

For full-time workers on fixed hours, fixed pay, and a fixed monthly salary, if they take a week’s holiday, they will receive the same pay at the end of the month as they normally receive.

When does holiday pay calculation get complicated?

When an employee does not work fixed or regular hours and receives variable pay each week, month, or other pay period, then calculating holiday pay becomes more complicated.

If this is the situation, an employer should revisit an employee’s previous 52 paid weeks (known as the holiday pay reference period) to calculate what said employee should be paid for a week’s leave.

The 52-week calculation starts at the point where holiday is due to be taken. The maximum time an employer can revisit to calculate holiday pay is 104 weeks. However, if you go back 104 weeks and there are only 40 eligible weeks then 40 should be used.

Not classed as earnings, and not to be used in the 52-week average includes:

• statutory leave
• sickness
• furlough
• holiday days and weeks
• weeks of no pay

How to work out holiday pay for monthly paid employees?

If an employee is paid a regular monthly salary, with fixed hours and fixed pay, there is no need to make a separate holiday pay calculation.

• Employees who are paid monthly with a variable salary

For employees who are paid monthly, but their salary varies e.g. depending on the amount of work they have completed, then the employer will need to use the holiday pay reference period as mentioned above.

Please note, it won’t be practicable in most circumstances to utilise 12 months of pay data since it won’t precisely align with a 52-week holiday pay reference period. This is because 12 months do not precisely correspond to the 52-week reference period required by legislation.

The last full week, from Sunday to Saturday, concluding on or before the first day of the leave, should be used as the starting point for the holiday pay reference period. If an employee who is paid monthly takes a day off in the middle of the week, the prior week’s salary collected between Sunday and Saturday will be the first week utilised to determine their holiday compensation.

It is common for the 52-week reference period to start and/or end midway through a monthly pay period (for example, a worker is paid on the last day of a calendar month for the whole month, but the reference period begins or ends in the middle of the month). Employers will then need to determine how much compensation was earned for the portion of the month that does fall within the reference period using their records of hours worked.

Employers will also need to use their records of hours worked to exclude parts of the month where the worker is on unpaid leave.

For employees that aren’t paid weekly, it is still important for their pay to be worked out each week. This is because the weekly pay figure is used to determine holiday pay via the reference period.

This article was written by Amy Sadler, a Manager in Price Bailey’s Payroll team. Amy has extensive experience advising and calculating accurate holiday pay for business’s employees. If you would like guidance on anything mentioned in the article, you can contact Amy using the form below.