How to Calculate Holiday Pay & Entitlement

holiday pay

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Entitlement to paid time off work is a fundamental workplace right in the UK. How much pay and time off work someone is entitled to will depend on several factors. This places an obligation on employers to ensure they are calculating holiday pay and entitlement correctly, or risk unwanted complaints and disputes with their workforce.

In this guide for employers, payroll and HR personnel, we explain the current rules on how to calculate holiday pay.

 

Holiday pay rules

Revised rules under the Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023, effective from 1 January 2024, were designed to simplify annual leave and holiday pay calculations under the amended Working Time Regulations 1998.

Under the amended Working Time Regulations 1998, those working fixed hours over a 5-day week are still entitled to a minimum of 28 days’ paid annual leave, equivalent to 5.6 weeks each leave year. This statutory minimum comprises a 4-week entitlement, as previously derived under EU law, plus an additional 1.6 weeks’ entitlement under domestic law to reflect the number of public holidays in England and Wales.

Almost all people classed as “workers” are legally entitled to 5.6 weeks’ paid holiday a year, commonly referred to as statutory leave entitlement or annual leave, including agency workers, workers with irregular hours and workers on zero-hours contracts. It is also worth noting that while 5.6 weeks’ paid holiday is the statutory minimum an eligible worker is entitled to take on an annual basis, an employer can offer more under the terms of an individual’s contract of employment. This is called contractual leave entitlement.

 

What is pro rata paid holiday entitlement?

When it comes to pro rata paid holiday entitlement, this often refers to where a new recruit starts their job role part way through the annual leave year, where they will only be entitled to the remaining amount of their total leave for that year on a pro rata basis. The leave year will often run from 1 January to 31 December, where statutory leave must usually be taken during this timeframe, otherwise the leave year will start on the first day of a new job.

Pro rata paid holiday entitlement can also refer to where an individual is working part-time hours. Part-time workers are still entitled to at least 5.6 weeks’ annual leave, but again on a pro rata basis, where this will amount to fewer paid days’ leave than their full-time counterpart. For example, if someone works 3 days a week, they must get at least 16.8 days’ leave a year (3 × 5.6), although the employer can choose to round this up. Equally, if an employer gives full-time employees more statutory annual leave by way of contractual leave entitlement, then part-time employees must also get the same pro rata.

 

Calculating annual leave entitlement

When calculating the amount of annual leave entitlement a worker can take, annual leave begins to accrue as soon as a worker starts their job, without any qualifying service requirement. However, an employer can often use either a “leave year” or an “accrual system” to work out how much leave workers should get during the first year.

Under the accrual system, a worker will receive one-twelfth of their paid annual leave entitlement in each month. For example, for the full-time employee working fixed hours over a 5-day week, after month 3 in their new job role, they will be entitled to 7 days’ paid leave or a quarter of their total annual leave (28 ÷ 12 × 3). Annual leave for those working regular hours will therefore continue to be 1/12th of the statutory entitlement for each month worked and then pro-rated thereafter, although employers can provide a more generous contractual entitlement, including giving workers a greater entitlement up front.

However, under the revised rules, for those with irregular hours, such as zero-hours workers, or for part-year workers, employers will be permitted to calculate accrued annual leave entitlement as 12.07% of the hours worked, not only for the first year but beyond.

The figure 12.07% is the statutory annual leave entitlement of 5.6 weeks expressed as a percentage of the number of working weeks in a year of 46.4 weeks. This means that paid leave will accrue from day one on the last day of each pay period at the rate of 12.07% of the total hours worked during that period, subject to a maximum of 28 days per year. For example, where a worker has undertaken 30 hours in a week, they would accrue 3.6 hours leave for that week (12.07% of 30). Further, under the amended Regulations, where the amount of annual leave that has accrued includes a fraction of an hour, the fraction is to be treated as zero if it is less than 30 minutes and as one hour if it is 30 minutes or more.

Under new statutory definitions set out in the Regulations, a worker is an irregular hours worker in relation to a leave year if the number of paid hours that they will work in each pay period during the term of their contract in that year is wholly or mostly variable. Part-year (term-time) workers are defined as someone who is required to work only part of the leave year where there are periods within that year, during the term of the contract, of at least a week which they are not required to work and for which they are not paid.

By using 12.07% to calculate holiday entitlement for irregular hours or part-year workers, this keeps their statutory leave entitlement in line with that of regular full-time workers. As such, the new rules rectify the flaws identified by the Supreme Court in the case of Harpur v Brazel in which term-time and other atypical workers could recover holiday pay based on an averaging method of 52 weeks, even if this meant that the worker received a windfall. The court observed in this case that the previous rules did not allow annual leave entitlement to be lawfully pro-rated downwards to reflect hours actually worked.

However, the revised rules will only apply to holiday years as from 1 April 2024.

 

Calculating holiday pay entitlement

By law, employers must usually provide holiday pay during a worker’s statutory leave, where workers are entitled to a week’s pay for each week of leave they take. However, the rate of holiday pay is calculated according to the kind of hours someone works and how they are paid for that time, including full-time, part-time, term-time and casual workers.

For full-time or part-time workers with fixed days or fixed hours, this is straightforward, although it can become quite complex for those working irregular hours. However, the general principle is that holiday pay received by a worker should reflect what they would be earning if they were at work, regardless of their working pattern. In circumstances where a worker does not receive the same amount of pay each week, month or other specified pay period, the employer should refer back to the previous 52 weeks to calculate what that worker should be paid. This is referred to as the holiday pay reference period.

Below we look at calculating holiday pay based on different working patterns.

 

Regular hours workers

For a full-time member of staff working fixed hours on fixed pay, a week’s pay will still be calculated based on that worker’s pay for a week. Again, for a part-time member of staff working fixed hours on fixed pay, a week’s pay will be based on their pay for a week.

Equally, under the new Regulations, the two distinct pots of annual leave (the 4 weeks’ leave as previously derived under EU law and the 1.6 weeks’ leave under domestic law) with the two minimum rates of pay have also been maintained. This means that workers will continue to be entitled to 4 weeks of annual leave at their normal rate of pay and 1.6 weeks at their basic rate, although many employers have long since taken a pragmatic approach, paying all 5.6 weeks’ annual leave at the higher normal pay rate.

However, in calculating the normal rate of pay, a new statutory definition has been introduced under the amended Regulations. This means that the following types of payments are to be included when determining the amount of a week’s pay:

payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract of employment
payments for professional or personal status relating to length of service, seniority or professional qualifications, and
other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the holiday pay calculation date.

Although intended to provide clarity, there remain grounds for uncertainty and challenge here, not least in respect of whether payments are “intrinsically linked to the performance of tasks” or have been paid with sufficient regularity. There may even be scope to include irregular payments, such as performance-related bonuses, although the Regulations are unclear on this point. Unfortunately, without clarification that only regular payments will be affected, the revised rules open the door to sizeable additional payments for holiday pay, where bonuses can make up a significant percentage of a person’s average weekly pay.

Interpretation of the new Regulations and what should be included as part of the holiday pay calculation may need to be tested before the employment tribunals in due course, but in sectors where bonuses are high, such as the financial services sector, the potential additional cost of including bonuses in holiday pay could be significant for employers.

Additionally, employers who do not currently include payments such as overtime, commission or bonuses in holiday pay calculations will now need to make a decision on whether to treat the two distinct pots of leave (the 4 weeks and 1.6 weeks) separately.

 

Irregular hours & part-year workers

For people working irregular hours, such as zero-hours workers, and for part-year workers, as they are entitled to paid time off for every hour worked, where their holiday entitlement is pro-rated to hours undertaken, one week’s pay will be calculated based on the average hours worked and hourly rate received over the past 52 weeks. However, for these types of workers, the practice of rolled-up holiday pay (RHP) has been re-introduced under the revised rules, where RHP will be permitted should the employer prefer this approach.

When adopting an RHP approach, holiday pay is calculated by way of a 12.07% uplift for all work done, rather than the worker receiving pay during their annual leave. If employers choose to use rolled-up holiday pay, they will be required to calculate a worker’s holiday pay as 12.07% of the worker’s total earnings within a pay period. The employer adopting an RHP approach must also itemise holiday pay separately on the worker’s payslip.

However, if implementing RHP, this does not allow scope for distinguishing between different types of EU-derived or domestic annual leave, and paying them at different rates, where the uplift must be paid on all earnings. A special formula must also be used for calculating holiday pay if a worker is on sick leave, maternity leave or other parental leave.

 

What are the paid holiday entitlement carry over rules?

As under the previous rules, a worker can carry over a maximum of 1.6 weeks’ paid annual leave, provided their employer permits this. Additionally, if a worker gets more than 5.6 weeks’ leave, their employer may allow them to carry over any untaken contractual leave.

However, to avoid uncertainty, the new rules ensure that workers can carry over some or all of any unused leave they were unable to take because of absence due to sick leave, or maternity or other parental leave. The new rules also clarify that irregular hours and part-year workers are allowed to carry over any accrued untaken leave in these circumstances.

Finally, if an employer is in default of the rules, the worker will have a right to carry forward holiday. This could be where the employer either fails to recognise a worker’s right to paid annual leave, or fails to give the worker a reasonable opportunity to take that leave or inform them that any leave not taken, which cannot be carried forward, will be lost.

 

Need assistance?

For specialist advice and guidance when dealing with holiday pay and entitlements, contact our experts.

 

Holiday pay FAQs

How does holiday pay work?

The way in which holiday pay works depends on the type of working pattern. For example, the annual leave entitlement of someone working irregular hours can be calculated as 12.07% of the hours worked based on their average hourly pay.

Is 20 days annual leave legal UK?

Most workers are entitled to a statutory minimum of 5.6 weeks’ paid holiday per year, which equates to 28 days for a full-time employee working fixed hours, where employers cannot provide less than this minimum.

How do you calculate holiday pay for part-time workers?

Part-time workers are entitled to 5.6 weeks’ paid annual leave on a pro rata basis, where this will amount to fewer paid days’ leave than their full-time counterpart. For example, 3 days a week equates to 16.8 days (3 × 5.6).

Is everyone entitled to holiday pay?

Last updated: 5 January 2024

Author

Founder and Managing Director Anne Morris is a fully qualified solicitor and trusted adviser to large corporates through to SMEs, providing strategic immigration and global mobility advice to support employers with UK operations to meet their workforce needs through corporate immigration.

She is a recognised by Legal 500 and Chambers as a legal expert and delivers Board-level advice on business migration and compliance risk management as well as overseeing the firm’s development of new client propositions and delivery of cost and time efficient processing of applications.

Anne is an active public speaker, immigration commentator, and immigration policy contributor and regularly hosts training sessions for employers and HR professionals

About DavidsonMorris

As employer solutions lawyers, DavidsonMorris offers a complete and cost-effective capability to meet employers’ needs across UK immigration and employment law, HR and global mobility.

Led by Anne Morris, one of the UK’s preeminent immigration lawyers, and with rankings in The Legal 500 and Chambers & Partners, we’re a multi-disciplinary team helping organisations to meet their people objectives, while reducing legal risk and nurturing workforce relations.

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