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  1. 1. How do I calculate holiday pay?

How do I calculate holiday pay?

August 17, 2021
No matter how much you love your job, taking some time off from work is essential for everyone. If we don't take time out to rest and recuperate, then burnout becomes a genuine possibility. In the UK, we lose more than 12.5 million days each year to work-related stress, anxiety and depression, so making sure you and your employees take care of themselves is not only morally right, it's also a good business decision.If you run your own business or are launching your own startup with a small team, you may be wondering how to work out the amount of holiday pay you and your employees are due. You may also feel the need to brush up on your knowledge about holiday entitlement and how to handle annual leave requests in your new company.We'll give you the lowdown on how to work out how much to pay your employees when they take annual leave.

How do I calculate holiday pay?

If you have a full-time employee on a salary, then calculating holiday pay is simple. They will earn the same as they would when working in the office, so there's no need to make any complicated calculations – you just pay them the same as usual.However, the rate of holiday pay for employees who have variable working patterns , such as part-time workers, casual workers or shift workers, is slightly more complicated. You'll also need to consider when people earn bonuses as part of their pay or commissions. Whether your employees (or yourself) work on a full-time or part-time contract, a zero-hours contract, work shift patterns, earn bonuses or work casual hours, it helps to remember this simple golden rule. When an employee takes a holiday, they should make the same pay as when they're at work. Otherwise, if people were afraid that they would be worse off for taking annual leave, there wouldn't be much incentive to take time off.

Know how much holiday to give your staff

All employees have a right to take annual leave. Remember, before you worry about how this will impact your business and the hassle of arranging cover, this is a good thing. Employees that are well-rested, happy and have a good work-life balance are more likely to be productive. There's also research that suggests that sleep deprivation can impair cognitive skills, so by encouraging your employees to take time off and catch up on sleep, you will boost their creativity and problem-solving skills.Just because you need to give your staff a minimum amount of holiday, you shouldn't feel constricted by this. Some companies offer very generous holiday packages. Netflix and LinkedIn both offer unlimited holiday allowances. That may be a little extreme for you, but if you and your employees have great trust, then it could be a great incentive to attract bright new talent!Whether your employees are full-time, part-time or on a zero-hours contract, they are legally entitled to annual leave. How much annual leave they get will vary, depending on when they work for you and on the contract you have with them. The rules are slightly different between full-time and part-time, but once you know them, they're easy to remember.

Annual leave for full-time employees

Your full-time employees are entitled to a statutory minimum of 5.6 weeks of annual leave per year, or 28 days. This is made up of a mixture of public holidays and other days. There are eight bank holidays in England and Wales. In Scotland and Northern Ireland, things are a bit different. Scotland gets nine bank holidays a year (Scotland gets an extra bank holiday at the beginning of January), and Northern Ireland receives ten bank holidays, including St Patrick's Day in March.Most contracts will state how leave is allocated over a 'holiday year' or 'leave year' and when the leave year in which the employee can take the annual leave ends. For example, a leave year may run from April 2021 until March 2022, which means that employees have until the end of March 2022 to use their holiday.If employees join a company part way through the year, then they earn their holiday entitlement pro-rata. For example, if an employee joins the company on October 1st, and the leave year ends on March 31st, they have six months left of that leave year. This gives them six-twelfths of annual leave because they earn one-twelfth of their annual leave for each month they work. If they have the minimum holiday entitlement of 28 days, this calculation gives them 14 days.

Annual leave for part-time employees

The annual leave for part-time employees is the same as the statutory holiday for full-time employees: 5.6 weeks or 28 days. However, this is worked out on a pro-rata basis so that employees get a fair amount of holiday in proportion to the number of hours they work.A simple way to work out the holiday entitlement of someone who works part-time is to multiply the number of days worked by the holiday entitlement. For example, if your employee works two and a half days each week, you multiply that by their holiday entitlement, 2.5 x 5.6, which comes to 14 days holiday each year.If you have employees who work shifts or other irregular hours, they are entitled to the same holiday rights.

Statutory vs contractual annual leave

Just because you have to give a minimum of 5.6 weeks of annual leave, it doesn't mean that you have to be bound by this number. If you want to give your employees more holiday in the year, you can put this in your employee's contract of employment. This is contractual annual leave, which is different to statutory annual leave. Some employers are also more generous with the holiday pay, which they will also detail in the employee's contract.

How do employees accrue annual leave?

From the first day that a new employee joins, switches on their computer and claims space in the kitchen for their mug, they start to build up their annual leave. Even if the employee starts with a probationary period, they are still accruing annual leave.The employee doesn't stop accumulating annual leave just because they are out of the office. If they are on parental leave or have to take time off because they are ill, they will still accrue holiday leave.Some employers will build restrictions into their employees' contracts to stop them from taking all of their annual leave during their first few months, at least for a while. This prevents an employee from taking a nice long vacation early on in their service, only to then up and leave. If you choose to do this, you'll need to explain this in your employee's contract of employment clearly.If you, or your employees, are at all unsure about how much holiday they are entitled to, then you can use the handy holiday entitlement calculator at https://www.gov.uk/calculate-your-holiday-entitlement.

What if I'm self-employed?

If you run your own business and are self-employed, you don't have any legal right to take a holiday. However, remember what we said about burnout. It's vital that you build in some time to relax and wind down. Plan to take 28 days holiday throughout the year, just as if you were an employee. Write these dates in your calendar so that you're not tempted to skip them. Try and spread them throughout the year, so you don't end up frazzled by Christmas.Since you won't be receiving holiday pay from an employer, try and build up a savings pot that will allow you to take time off without worrying about paying the bills.Also, if you are self-employed and working as a contractor, your contract may include some holiday entitlement, so check your paperwork.

When do I have to pay employees their holiday pay?

You have to pay your employees their holiday pay whenever they choose to take their holiday. You can't spread the holiday payment throughout the year by topping up their regular hourly, weekly or monthly payments in small doses. This is known as rolled-up holiday pay, and it is illegal.

What about employees with different rates of pay?

When employees have varying shift patterns or earn bonuses or commission on top of their salary, it is a little trickier to do their holiday pay calculations. This is because what they make varies from week to week. Employers will need to work out what the employee earns in an average working week.

What should be included in holiday pay?

Employees should never financially lose out because they're on holiday. Otherwise, they may decide that they can't afford to take leave from work at all. This could lead to stress, illness and a demotivated workforce.When an employee takes annual leave, they should still receive pay for things like guaranteed overtime. If they regularly earn a bonus, then this should be taken into account when calculating holiday pay.

What about leftover holiday leave?

This will depend on your contract with your employees. Some companies have a "use it or lose it" policy, meaning that any leftover holiday employees fail to take at the end of the leave year is lost. Some companies will allow their employees to roll over a few days into the new leave year, giving them more flexibility.When the COVID-19 pandemic hit, the government introduced new legislation for carrying over holiday leave. This allowed workers to roll over up to four weeks of annual leave into the next leave year if the virus meant that they couldn't use these dates in the previous year.You may decide to allow your employees some flexibility and carry unused holidays into the next leave year. However, you should first check how this will impact your business and encourage any employees rolling over holiday to take it as soon as possible.

Can I make a payment in lieu of holiday?

No, you can't pay an employee not to take a holiday. However, if an employee is leaving your company, you will need to pay them for any untaken statutory leave.

Can I refuse a holiday request?

You can refuse an employee's request for a holiday, but you must be fair. You have to have a clear justification for your decision. For example, if your business is extremely busy during the Christmas period, you may not be able to allow all your team time off.If you need to cancel an employee's leave, you must give them adequate notice, just as they need to give you enough notice when requesting time off. If an employee asks for five days of holiday, they should give their employer at least ten days notice. If an employer refuses that same request, they should let the employee know at least five days before the start of the holiday.

Can I decide when my employees take annual leave?

Yes, you can ask your employees to take holiday during certain times of the year, but it must be non-discriminatory, and you have to give enough notice. For example, you may need to cover specific busy periods or just ensure that not everyone is on leave simultaneously.

Summary

We all must take a break from our work. Whether it's a staycation or a trip to far-flung shores, holiday leave ensure that we all stay well-rested and productive. All employees are entitled to holidays and holiday pay. Once you've worked out how much you need to pay your employees when they take annual leave, you can relax and start planning your own well-earned vacation.
Rachel Cameron-Potter
Rachel Cameron-PotterContent Marketer

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