Holiday Pay

Are you compliant with the new 52-week reference period?

From April 2020, the law regarding Holiday Pay for workers who do not have fixed hours or pay changed. This must now be calculated using a 52-week reference period. Unpaid weeks must not be included.

Previously, there were two methods used for holiday pay:

  1. Pay 12.07% of pay as holiday pay
  2. Calculate the average pay over 12 weeks

Unfortunately, neither of these two methods comply with the new law. In fact, the notion of rolled-up holiday pay is no longer acceptable.

All workers are entitled to 5.6 weeks paid holiday per year.

The first change is that a 52 week reference period must be used (not 12). The 52 weeks used for the calculation, can only be “paid weeks” i.e any unpaid weeks where the worker was not paid, must be ignored.

A welcome change is that employers are not be required to look back further than 104 weeks (2 years). However, because of the requirement to use 52 paid weeks, it will not be possible to only use 1 year of history – you will need to disregard unpaid weeks.

If the employer maintains 104 weeks of historical pay data and is unable to find 52 paid week, then the maximum number of paid weeks can be used. For example, you only paid the worker in 40 weeks of the last 104, then it is sufficient to use these weeks.

Importantly, the pay data used must be weekly data. You can not use 2-weekly, 4-weekly or monthly pay. If workers receive pay other than weekly, then it will be necessary to maintain records of the pay and hours for each week in order to do the weekly calculation.

How to calculate holiday pay?

While it sounds simple, the calculation is difficult to do in practice. The full details can be found here. It means:

  • Maintaining a detailed record of 104 weeks of pay data for each worker – when they were paid (date, amount).
  • Every time holiday is booked, a new weekly average must be calculated using 52 paid weeks (disregarding the unpaid weeks) looking back up to 104 weeks.
  • Only use the elements of pay that should be included for holiday pay.
  • The pay history must be detailed enough to be computed per week.
  • Once you have a weekly average, you will need to convert the weekly amount to the number of days actually taken as holiday (workers don’t often take exact multiples of weeks).

Can I do this in Excel?

Probably not as you will need programming skills. It is difficult because of the need to ignore unpaid weeks and only use 52 weeks of paid data. It is not a fixed calculation across 52 or 104 cells. An excel sheet would need to be updated each week with new pay data for every worker where the older data was removed. Furthermore, 2 payments which fall in the same week must be added together and used a single week amount.

Automating Holiday pay

The only practical way to implement the new legislation is to use payroll software which can automate this task. Holiday pay then becomes another calculation in payroll and is as easy as PAYE, NIC or Auto-enrolment. Here are the questions to ask when choosing new payroll software for holiday pay:

  1. Does it record every payment made by date in order to be able to perform the required weekly calculations?
  2. Can the software import 104 weeks of historical pay data. This is critical otherwise you will need to wait for 2-years to be compliant.
  3. Can the software import existing data from existing payroll, HR, CRM or ERP system?
  4. Does the software allow you to specify only the Pay Items that need to be included in the holiday pay calculation?
  5. If you pay monthly, 2 or 4-weekly, does the payroll software record precise weekly data?
  6. Does the payroll software keep records of each holiday booking?

These requirements are critical for automating holiday pay.

Checkout our full set of holiday pay resources here