How to calculate holiday pay

28 June 2017

A bit about the speaker…

Emma Rowley originally trained as a Barrister, then as a Solicitor and has been a Tribunal Advocate for Citation for five years now.  Emma’s experience and expertise has been fighting off Employment Law claims for clients up and down the country.

Intro

When it comes to holiday pay, case law is constantly changing, which can make it a tricky one for employers to get their head around and accurately apply. To make matters worse, it’s one of the areas of Employment Law that employees research their rights on most, too.

Holiday entitlements

All employees are entitled to 5.6 weeks (a maximum of 28 days) of holiday leave a year – including any bank holidays taken. Of these 5.6 weeks, 20 days are based on European law, and the remaining eight are under UK law.

If you’ve got any part-time workers, they get exactly the same leave entitlement as full-timers on a pro rata basis.

Holiday entitlement begins from an employee’s first day of employment.  However, you can restrict the individual taking this entitlement during their first year of employment to 1/12th of the full leave entitlement for each month of service. This can be done to stop employees using all their holiday leave and then leaving your business. This kind of information should be explained in the employee’s contract of employment.

Although annual leave can’t normally be carried over from one year to another, there are a few exceptions – if a long-term sickness prevents an employee from taking leave, maternity, adoption or parental leave, for example. In these situations, the employee can carry any untaken leave over into the next leave year.

Holiday pay and commission

For the purpose of explaining holiday pay and commission, we’ll use a working example. Let’s say you’ve got an employee called Alan who works in sales and receives a basic salary, 10% commission on all sales and a potential performance bonus each quarter if he reaches his targets.  Because of Alan’s commission and bonuses, his earnings will change from week-to-week.

For his holiday pay, Alan should receive an average of his last 12 weeks’ pay for each period of annual leave.

For the first 20 days leave that Alan takes (which is the European element of his annual leave), his standard holiday pay should be his basic pay, plus any commission linked to the performance of his role, plus any other allowance which is intrinsically linked to the performance of the role – like his bonuses.

For the remaining eight days of his annual leave, you’re only required to pay Alan his basic salary.

Holiday pay and overtime

For the purpose of demonstrating holiday pay and overtime, we’ll use Betina as an example. Betina’s a nurse who works day and night shifts at different rates of pay. Betina’s contract is for 20 hours a week, however, she regularly works an additional eight hours overtime.

When calculating Betina’s holiday pay, for the first 20 days leave she should receive an average of her last 12 weeks’ pay for each period of annual leave – including any overtime worked. This is because Betina’s overtime is regular.

For the remaining eight days of her annual leave, you’re only required to pay Betina her basic salary.

As with most things in life though, it’s not that simple and there are a few exceptions. As it stands, if overtime is sporadic and doesn’t form part of the employee’s ‘normal hours’ and regular pay, you don’t have to include it as part of their holiday pay.

Remember…

To check employees’ contract of employment, to see if there are any additional contractual annual leave of enhanced terms in relation to their annual leave.

Need a hand?

If you’re having a hard time calculating holiday pay and need a helping hand, get in touch with one of our friendly experts today.

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