Holiday Pay

If you employ staff you need to be aware of your responsibility to them. This includes making sure they have acceptable working conditions, fair treatment and at least the minimum benefits of employment.

One of these minimum benefits is their entitlement to a minimum amount of paid holiday each year. We go into the specifics about holiday pay, as well as how to calcualate it, in this blog.

How much holiday pay are employees entitled to?

Legally, almost all employees are entitled to 5.6 weeks paid holiday per year. For employees who work five day weeks, this will be calculated at twenty-eight days paid holiday per year. If an employee works fewer days a week, then you multiply the number of days (they work) per week by 5.6 to get their annual holiday entitlement.

For employees that work irregular hours, holiday entitlement is more difficult to calculate – more about this below.

What are the limits on holiday entitlement?

The entitlement is limited to twenty-eight days per year. An employee who works six days a week will have twenty-eight days holiday entitlement instead of thirty-four days.

There is no requirement for employers to give employees time off for bank holidays. However, without incentive, this may hurt staff morale if you don’t.

It is common practice to give employees these days off and subtract them from the total holiday entitlement. This means an employee would have eight bank holiday days and twenty regular holiday days per year, at the minimum entitlement.

How is holiday pay calculated?

For each week of holiday an employee takes, they are entitled to be paid their regular amount for that week. For employees with fixed hours and pay, this is easy to calculate.

In the instance of employees with irregular hours, workout their average pay over the last twelve weeks and use this figure. If there was a week that was unpaid, in the twelve you are using to calculate the average, ignore it and use an additional earlier paid week, until you have twelve paid weeks to calculate your average.

Holiday pay should be paid when an employee uses holiday entitlement, it should not be added to an employee’s regular wages as an alternative to taking the holiday.

How do you calculate holiday pay for a new employee?

An employee will build up their annual holiday entitlement from the moment they begin working. There are two methods of calculating an employee’s holiday entitlement:

The ‘leave year’ method

The ‘leave year’ method calculates holiday entitlement by setting a date at the end of the year when employees need to have taken all holiday days. After this date the next year’s holiday entitlement begins.

Employers should have this date set out in the employment contract. Alternatively, it will be the same date as the employee’s first day of work. Holiday entitlement is not affected by maternity, paternity or adoption leave.

If the employer sets a ‘leave year’ date, and the employee begins work part-way through the year, then the holiday will be calculated as a percentage of the ‘leave year’ the employee works. For example, if the employee starts halfway through the ‘leave year’ then they would be entitled to fourteen days paid holiday for the period up to the end of the ‘leave year’.

The accrual system

The accrual system can be used by employers to calculate the first year of holiday entitlement for an employee. This method involves an employee building up one-twelfth of their annual holiday entitlement per month.

Can employees carry over holiday pay?

An employee can carry over a maximum of eight days, of their twenty-eight days holiday entitlement, into the following year. If an employee cannot use all of their holidays due to illness then they can carry up to twenty days holiday – dependant on what they did not use.

Using holiday pay

Employees must give their employer a period of notice before a holiday. This notice should be twice the duration of a holiday, unless otherwise agreed in the employment contract. An employer can refuse, however, they must give a notice of at least the holiday’s duration to the employee.

Please bear in mind this doesn’t mean that employers can refuse to let employees take holiday indefinitely!

Employers are able to restrict when holidays are taken, for example during busy periods. Employers can also tell their staff to take holidays, for example, bank holidays.

If an employee is entitled to holidays for part of a workday then it is up to the employer to decide how this will be taken.

Calculating the holiday pay for an employee who is leaving

During an employees’ notice period, they can use up the rest of their holiday entitlement. The entitlement is calculated based on how much of the year has passed. Similarly to a starter’s holiday entitlement for the first year.

If an employee takes additional leave than what they are entitled to, the employer must not take this from their final wage without a written agreement.

In the case that the employee does not use up the last of their holiday entitlement upon leaving, the employer must add this to their final wage. This is the only time where holiday pay can be added to regular wages, instead of holiday entitlement being used.

Additional holiday pay

Some employers may decide to give their employees additional days holiday to the minimum entitlement amount. When this happens the employer has a lot more control over the additional holiday. Often this will include granting additional holiday days for reaching a certain number of year’s service to the employer.

An employer may allow their employees to carry any amount of the additional holiday pay over to the following year.

When an employees leaves and does not use up the additional leave, the employer and employee can agree to a separate arrangement on how to handle this.

The gov.uk website has a useful holiday pay entitlement calculator to help with determining irregular hour holiday pay, as well as an entitlement for first year and final year employees.

If you would like any additional advice or information regarding the above, or with payroll accounting in general, then please do not hesitate to contact us.