2. Holiday pay calculation

Historically

Historically, employers operated one of three approaches to holiday pay:

  1. Full or part-time employees with fixed hours received an annual holiday entitlement, for example, 28-days. Workers continued to receive their normal pay during a holiday.
  2. Agency, irregular or zero-hours workers with no fixed hours would receive 12.07% of base pay as holiday-pay.
  3. Full or part-time employees with fixed hours would receive fixed payments for each holiday.

In general, the clear statements from ACAS and GOV.UK mean that these approaches can no longer be used:

Overtime, commission and bonus

If you regularly get paid overtime, commission or bonuses, your employer must include these payments in at least 4 weeks of your paid holiday.

ACAS

This means it is no longer possible to merely provide a holiday entitlement without calculating holiday pay.

Where employees receive regular variable pay, in the form of overtime, commission or bonuses, then the usual holiday entitlement no longer follows the new law. Any pay changes in the last 52 weeks would also need to be included.

Rolled-up holiday pay

An employer cannot include an amount for holiday pay in the hourly rate (known as ‘rolled-up holiday pay’).

If a current contract still includes rolled-up pay, it needs to be re-negotiated.

GOV.UK

This means that any employer who uses 12.07% ‘rolled-up’ holiday pay can no longer do this. The previously endorsed ACAS guidance has now been removed.

A week’s pay

Workers are entitled to a week’s pay for each week of statutory leave that they take.

GOV.UK

All holiday-day pay needs to be calculated from a week’s pay. You cannot use monthly pay.

There is one specific case where employers can continue with approaches (1) or (3). This is where employees receive no overtime, commission or bonus on a regular basis, and they have received no change or reduction in pay the previous 52-weeks. In these cases, where pay is truly fixed, holiday entitlement or a fixed holiday payment will comply with the new regulations. They continue to receive the same pay on holiday as they would at work and one week’s pay is the same as one week’s holiday. Note, that any reduction in pay in the preceding 52-weeks will require a more complex calculation as described below.

One week’s pay

Because workers are entitled to one week’s pay for each week of leave they take, everything centres on this calculation.


Calculating one week’s pay and the 52-week holiday pay reference period

Previously, some employers used the 12-week average for holiday pay. This has now increased to 52 weeks. Each time a worker takes a holiday, you will need to calculate one week’s pay using a 52-week holiday reference period. Here are the 3 steps:

1. Identify the last complete working week

A week normally starts on a Sunday and end on a Saturday. There is an exception for workers who are paid weekly and have a pay period that uses a different day of the week, then the week will end on that day. For example, if the pay period ends on a Friday then the week will start on a Saturday and end on a Friday.

The holiday pay reference period starts from the last complete working week worked that ended on or before the first day of leave.

2. Construct the 52-week holiday pay reference period

You will need to include 52 reference weeks counting back from the last complete week as follows:

Full or part-time workers with fixed hours

Pay data used must be weekly. 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/ hours for each week to calculate the pay for each week. The pay for each week must be established so you can construct a 52-week holiday pay reference period. Many weeks will across two months and require data from each month’s pay.

For monthly paid workers, you will need to calculate the average hourly pay for the month, then calculate weekly pay by the average number of hours worked each week.

If the worker has not been employed for 52-weeks, then you can use only the available weeks.

Agency workers or zero-hours workers without fixed hours or pay

The 52 weeks used for the calculation, can only be paid weeks. Ignore any unpaid weeks where the worker was not working.

Employers are not be required to look back further than 104 weeks. However, because of the requirement to use 52 paid weeks, it will not be possible to only use 52 weeks of history.

If the employer maintains 104 weeks of historical pay data and is unable to find 52 paid weeks, 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.

This is more complicated for workers whose pay varies each month and who have different Pay Items. Not all Pay Items need to be included and you will, therefore, need to identify pay that forms part of holiday pay. For example, regular commission and overtime would be included, but an infrequent bonus would be excluded.

3. Calculate One Week’s Pay and convert into days

One week’s pay is the average of the last 52 weeks of weekly pay (the holiday pay reference period).

Once you have determined the figure for one week’s pay, then one week of the holiday will equal this amount. Normally holiday is not taken in full weeks, and therefore you will need to convert from weeks to days depending upon working days. For example, a 2-day holiday booking for a Monday-Friday worker will be 0.4 of a week. Note, there are no regulations on how to convert the entitlement into days or hours for workers with irregular hours.

Calculation Summary

Clearly, the calculations are complex and very difficult to do manually.

Can I do this in Excel? Probably not as you will need programming skills. Monthly data must be converted to weekly data and there is no automated way to do this. It is also 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. A worksheet 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 as a single weekly amount.

Full information and examples are provided here. In summary you will need to:

  • Identify the last working week for each holiday booking
  • Maintain 104 weeks of pay data for each worker (date, amount)
  • Calculate a new weekly average using 52 paid weeks for each holiday booking – look back up to 104 weeks and disregard unpaid weeks
  • Only include holiday Pay Items in the calculation
  • Allocate every payment to one week (there may be more than one payment in a week)
  • Convert non-weekly pay to weekly
  • Once you have a weekly average, you will need to convert the weekly amount to the number of days taken (workers don’t often take exact multiples of weeks)

Disclaimer

This guide is based on the following sources:

https://www.gov.uk/holiday-entitlement-rights/holiday-pay-the-basics
https://www.gov.uk/government/publications/calculating-holiday-pay-for-workers-without-fixed-hours-or-pay
https://www.acas.org.uk/checking-holiday-entitlement

The Content presented here does not constitute advice on which you should rely.  It is provided for general information purposes only.  Professional or specialist advice should always be sought before taking any action relating to holiday pay. We make reasonable efforts to ensure that the Content is complete, accurate, and up-to-date.  We do not, however, make any representations, warranties or guarantees (whether express or implied) that the Content is complete, accurate, or up-to-date. Each situation will differ and this guide is not a substitute for legal advice. It must therefore not be relied upon and we are not liable for any loss or damage.

Previous 1. Holiday pay overview
Next 3. Automating holiday pay
Table of Contents