Last reviewed 4 November 2017
Almost all workers (which includes employees but not the genuinely self-employed) are legally entitled to 5.6 weeks’ paid holiday per leave year. Most workers who work a five-day week must receive at least 28 days’ paid annual holiday per year. This is the equivalent of 5.6 weeks’ of holiday. Statutory paid holiday entitlement is limited to 28 days, even if the individuals works a six-day week. However, the calculation of holiday pay is not so straightforward. Paul Tew, small business consultant and freelance advisor, outlines the very latest position on how holiday pay should be calculated.
Determining holiday entitlement
Holiday can be divided into three separate components, four weeks’ leave provided under European law, an additional 1.6 weeks’ leave provided by UK law and any additional entitlement given in the employment contract or relevant workforce agreement. A worker must take at least four weeks’ paid holiday per leave year. For the remaining 1.6 weeks, holiday can be carried forward into the next leave year. However, employers cannot make a payment in lieu for any days that remain untaken.
If an employer offers more than 5.6 weeks’ annual holiday, arrangements as to how the extra holiday is to be treated should be a contractual matter. The worker may be entitled to either carry over the untaken days into the next leave year, or receive a payment in lieu of those untaken days.
Part-time workers are entitled to receive holiday on a pro rata basis to full timers, so the statutory entitlement is 5.6 x the number of days in the normal working week. For example, a worker employed for two days a week would be entitled to 11.2 days’ leave a year (2 days x 5.6 = 11.2 days). Employers can round entitlement up to the nearest full day or half day but it is not permissible to round entitlements down.
Casual or zero hours contract workers can have their holiday entitlement of 5.6 weeks calculated as 12.07% of their hours worked. The 12.07% figure is 5.6 weeks’ holiday, divided by 46.4 weeks (being 52 weeks - 5.6 weeks). The 5.6 weeks are excluded from the calculation as the worker is not working during those 5.6 weeks.
Calculating holiday pay
Case law has established five key principles for employers to factor in particular payments made to workers when calculating holiday pay for the purposes of the basic four weeks’ leave.
Holiday pay is no longer calculated on basic pay alone, employers must take into account a worker’s total remuneration, where any payment is intrinsically linked to the worker undertaking their employment duties.
Commission payments must be included in any calculation, including a notional amount of commission that would have been earned during any annual leave period taken by the worker.
Contractual overtime payments are taken into account, where this is compulsory and provided for within a specific clause in the employment contract or other workplace agreement.
Non-contractual overtime payments, where the overtime is not guaranteed but the requirement to work is nonetheless regular in nature. Employers must include regular overtime in their workers’ holiday pay calculation as for the purpose of paid annual leave normal pay is that which is normally received.
Voluntary overtime, where the employer is not obliged to offer overtime and the workers are not required to work it, must be included in holiday pay, where the pattern of work extends for a sufficient period of time on a recurring basis to justify the description “normal”.
A week’s holiday pay is worked out according to the individual’s working hours and how the worker is paid for the hours. This includes full-time, part-time and casual workers.
Week’s Holiday Pay
Fixed hours and fixed pay
The amount a worker normally receives for a week’s work.
Shift work with fixed hours
The average number of weekly fixed hours a worker worked in the previous 12 weeks at their average hourly rate.
No fixed hours (ie irregular ad hoc work)
The average pay a worker received over the previous 12 weeks (in which payment is made).
To calculate the average hourly rate, only the hours worked and how much was paid should be counted. Take the average rate over the last 12 weeks before the period of paid holiday starts. If no pay was paid in any week, due to no work, it is necessary to count back a further week, so that the rate is based on 12 weeks in which pay was paid. For example, if no pay was due in the fourth week of this period, the reference period should cover weeks one to three and weeks five to 13.
Rights to receive holiday pay
Workers build up holiday from day one and entitlement is not subject to a minimum period of employment. An employer can use a “leave year” or an “accrual” system to work out how much leave their workers should receive.
If a worker starts their job part way through an employer’s leave year, entitlement is for part of the total annual leave for the current leave year, so this depends on the time left between the employment start date and end of the leave year.
An employer can use an accrual system to work out a worker’s leave during the first year in employment. Under this system, a worker accrues one-twelfth of their leave at the start of each month. So, by the third month the individual would be entitled to a quarter of their total leave entitlement, for example, seven days out of 28 for a five-day week worker.
Workers have no legal right to paid leave on bank and public holidays. However, an employer can include bank holidays as part of statutory paid annual leave entitlement. If an employer gives workers additional time off on bank holidays, then this should be given to part timers pro rata, even if the bank holiday does not fall on a usual work day.
Paying holiday pay
Holiday pay must be paid for the time when annual leave is taken. An employer cannot insert in the employment contract a clause providing for an amount for holiday pay to be included in the hourly rate (known as “rolled-up holiday pay”).
The only time a payment must be made to a worker instead of actually taking a period of statutory leave (known as “payment in lieu”) is when the worker leaves the employment. Employers must pay for untaken statutory leave (even if the worker is dismissed for gross misconduct).
Employer can calculate the holiday pay due using the formula (A x B) - C, where:
• A is the total holiday entitlement for the holiday year
• B is the fraction of the year to the date of leaving
• C is the amount of holiday already taken.
If the worker leaves three months into the leave year having taken four days off, then applying the formula above: 28 x (3 ÷ 12) - 4 = 3 days leave to be paid in lieu.
An employer must obtain the worker’s signed agreement to make a deduction from the final payment for any holiday which has been taken in excess of their accrued entitlement.