How to calculate holiday pay: the employer's guide

  • Pay & Benefits
Peninsula Group Limited - an employee appealing their disciplinary procedure
James Potts - Legal Services Director at Peninsula

James Potts, Legal Services Director

(Last updated )

Now summer has arrived, expect to see the holiday requests come flooding in.

Which means you’ll need to know how holiday pay works. Legally, you have to provide a week’s pay for each week of holiday your staff take. The way you have to calculate this pay varies depending on your worker’s contract but generally, their statutory minimum holiday entitlement will be 5.6 weeks a year.

To make sure you’re paying your staff the right amount to stay safe from legal risks, here are six things to consider…

1. Weekly pay

First, you need to figure out how much you pay your worker on a weekly basis. For every week of annual leave they take, you’ll need to pay them the same amount you would for a week’s work.

If your staff work full-time on fixed hours, it’s easier to calculate. You just need to multiply your worker’s hourly pay by how many hours they work in the week.

It’s more complicated if your staff have zero-hour contracts. Which is why the next thing you need to do is check their…

2. Working pattern

Your staff might not work the same hours every week. If they work on different shift patterns, it’s not obvious what a week’s pay looks like.

There are legal rules around calculating holiday pay for workers with variable hours. Since 6th April, you need to calculate holiday pay for these workers based on their average earnings from the past 52 weeks.

If your staff fall into any of the following categories, this is what you have to do…

  • Category A: Staff have fixed hours and fixed pay

For each week of leave your staff take, you’ll need to pay them the equivalent of a week’s work.

  • Category B: Staff have fixed hours but not fixed pay

Staff might have fixed hours of work, but their pay might vary if they work shifts or get commission on top. So, you’ll need to calculate their average weekly pay from the past 52 weeks. You can find the average by adding up 52 weeks’ worth of pay (including overtime or bonuses) and dividing that figure by 52.

  • Category C: Staff don’t have fixed hours

For staff who take on casual work or have zero-hour contracts, you’ll need to calculate their average pay from the last 52 weeks of work (but only counting the weeks you paid them for). If someone only worked 50 weeks in the past 52 weeks of work for example, then count back two weeks to reach 52 weeks. You can only count back up to 104 weeks at a maximum.

  • Category D: Staff have worked less than 52 weeks

Have your staff worked less than a year? If so, the way you calculate the average will be the same, but you’ll need to adjust the figure to how many weeks they have worked for you.

3. When the holiday pay period starts

Once you’ve figured out which scenario applies to your staff, make sure you know when to start paying holiday pay.

By law, you need to start paying holiday pay from the last full working week your staff worked - ending on or before the first day of leave. This should start on a Sunday and end on a Saturday.

This might not be the case if you pay your workers on a weekly basis. You might calculate your worker’s weekly pay on a different day other than Saturday. For example, if you treat a week as ending on a Wednesday, then start the week period on a Thursday, so it finishes on a Wednesday.

4. Overtime, commission, and bonuses

You will also need to consider any additional pay you give to staff. If you regularly pay staff bonuses or overtime, you need to include these payments in at least four weeks of their paid holiday. This includes:

  • regular voluntary overtime – paid overtime that staff don’t have to work but choose to
  • non-guaranteed overtime – paid overtime that staff have to work if you ask them to (if it’s in their contract)

You might want to include these additional payments in their full 5.6 weeks’ paid holiday, but you’re not obliged to.

5. ‘Rolled-up’ holiday pay

You should pay staff for their holidays when they take them. You shouldn’t try to include holiday pay in your staff’s hourly rate. This is an example of ‘rolled-up’ holiday pay – which is against the law.

You must pay your worker while they’re on leave, rather than trying to spread it out over the year.

6. Holiday pay for holidays that aren’t taken

If your staff don’t take their annual leave, you still need to pay them for it. If your worker is leaving their job, you’ll need to pay them for the holiday they have remaining.

You can set out specific rules about holiday pay in your staff contracts. It might the case that you allow workers to carry over holiday or you ask that they take it during the year or they’ll lose it. It depends on what you have specified in their contract.

If you don’t pay staff their holiday pay entitlement by the time they leave their job, they may have grounds to make a claim against you.

No stress, focus on your success this summer…

Trying to calculate holiday pay can be hugely time-consuming and stressful, especially when you have to dig out your staff contracts and read the fine print.

But don’t worry. When you join Peninsula, your HR experts are on hand to make sure you never sell your staff short.

And to make absence and holiday management even easier, as a Peninsula client you have instant access to innovative online HR software – helping you manage staff holidays, rotas, and your confidential documents all from your devices. So, you can stay safe on the go.

HR is an unnecessary stress. Whether you need to update your holiday policy or resolve a staff dispute, leave it to your HR advisers. Because with Peninsula, you can focus on your business while we protect it.

Don’t take the risk – whatever your HR query, talk it through with an industry-leading professional. Just give us a ring on 0800 029 4384 for a complimentary free advice call today.

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