Calculating Holiday Pay & Entitlement

One of the primary employment rights in the UK is that workers are entitled to a minimum amount of paid time off work as holiday, or annual leave. Holiday entitlement and how holiday pay is calculated will depend on how many hours an individual works. For employers, this can quickly become complicated when someone doesn’t work fixed or regular hours.

The following practical guide for employers and HR personnel outlines the rules relating to holiday pay, from how much paid time a worker can take to calculating the amount of pay.

 

What paid holidays are staff entitled to?

Most individuals in the UK who work a 5-day week have the legal right to 5.6 weeks’ paid holiday per year. This is the statutory minimum amount of paid leave that an eligible individual is entitled to take on an annual basis. This can include agency workers, shift workers, casual workers, term-time workers and workers on zero-hours contracts. Employers can provide their staff with enhanced contractual rights to more paid leave, although they cannot offer them less than the legal minimum.

If a new recruit starts their job part way through the annual leave year, they’ll only be entitled to the remaining amount of their total leave for that year on a pro rata basis. The dates of the statutory leave year will usually be set out in the contract of employment, written statement of particulars or any annual leave policy. The leave year will often run from 1 January to 31 December, where statutory leave must be taken during this timeframe, unless contractual provision is made for the right to carry leave over.

If the leave year is not specified, then it will typically start on the first day of a new job.

 

How is holiday entitlement calculated?

For a full-time employee working fixed hours over a 5-day week, the statutory minimum amount of paid leave of 5.6 weeks equates to a total of 28 days per year. Bank holidays and public holidays can be included in this entitlement. This should be specified in the contract of employment.

A part-time employee will be entitled to fewer statutory paid days’ leave than their full-time counterpart, although their holiday entitlement can be easily calculated by multiplying the number of days worked each week by 5.6, so a 4-day week would equate to 22.4 days paid leave (4 x 5.6). An employer can choose to round this up, but they cannot round it down. It’s also worth noting that if an employer gives full-time employees more than the statutory annual leave, then part-time employees must get the same, albeit calculated pro rata.

Workers with irregular working hours, such as part-year workers or shift workers, are also entitled to 5.6 weeks’ paid holiday as a minimum. This should not be affected by how many weeks they actually work in a year.

However, the way in which statutory leave entitlement will accrue can differ for those working irregular days or hours. For example, a zero-hours contract worker will be entitled to paid time off for every hour they work, so it’s easier to calculate their entitlement based on the number of hours worked. In this scenario, by adopting a calculation of 5.6 weeks paid leave divided by 46.4 remaining weeks in the year, statutory leave will accrue from day one at a 12.07% rate of the total hours worked. For example, where a worker has undertaken 30 hours in a week, they would accrue 3.6 hours leave for that particular week (12.07% of 30).

 

Holiday entitlement for new joiners

The right to paid holiday arises from day one of employment, without any qualifying period. However, an employer can use an accrual system to work out an individual’s leave during the first year of the job. Under this system, for anyone working fixed days, this will initially accrue monthly, in advance, at a 1/12 rate of their annual entitlement. For example, for the full-time employee working 5 days a week, after the third month in their new job, they’ll be entitled to 7 days’ leave, or a quarter of their total leave (28 ÷ 12 × 3).

 

Holiday entitlement while on leave

Annual leave cannot be taken during a period of statutory leave. The worker will continue to accrue holiday entitlement whilst on statutory leave, such as sick leave, and can even request holiday at the same time as they’re on sick leave.

 

How is the rate of holiday pay calculated?

All workers are legally entitled to one week’s pay for every week of statutory leave that they take, where the rate of statutory holiday pay is calculated according to the amount of days or hours that someone works and how they’re paid for that time.

 

Holiday pay for fixed-hour workers

For full or part-time workers with fixed days or fixed hours, this is relatively straightforward, although it can become much more complex for those working irregular hours. However, the general principle is that holiday pay received by a worker should reflect what they would’ve earned if they’d been at work, regardless of their working pattern.

 

Holiday pay for workers with irregular hours

The Employment Rights (Amendment, Revocation and Transitional Provision) Regulations 2023 came into force on 1 January 2024, providing employers of irregular-hours workers and/or part-year workers the option to either pay those workers:

• holiday pay when holiday is taken and to calculate that holiday pay using a 52-week average; or
• rolled-up holiday pay, applying the 12.07% calculation and then not pay any holiday pay when holiday is actually taken.

These changes apply to holiday years starting on or after 1 April 2024. As such, if an employer’s holiday year follows the calendar year and starts on 1 January, these changes will not take effect until 1 January 2025.

As such, in circumstances where a worker doesn’t receive the same amount of pay each week, month or any other specified pay period, there are two steps to take to calculate holiday pay entitlement. First, calculate the amount of holiday time they are entitled to, and then the amount of holiday pay they get for that time.

To do this, the employer should look back at the previous 52 weeks to calculate what that worker should be paid. This is referred to as the holiday pay reference period. This reference period used to be just 12 weeks, but the law was changed in April 2020.

For agency, shift, casual, term-time and zero-hours contract workers, their holiday pay should be calculated by taking the average number of hours worked during the previous 52 weeks, discounting any weeks not worked by that person, and for which no pay was actually received. If there was no money paid in any week, the employer should count back to any previous week so the rate is based on 52 weeks in which pay was received, up to a maximum of 104 weeks.

If a worker with variable pay or hours hasn’t been employed for long enough to build up 52-weeks pay data, their employer should take an average of as many complete weeks they have. For example, if an individual has been with the same employer for 40 weeks, that’s what the employer should use, ignoring any weeks not worked and where money wasn’t paid.

When calculating the rate of holiday pay, the following rules will therefore apply:

• Fixed hours and fixed pay, either full or part-time: a worker’s pay for a week
• Shift work with fixed hours, either full or part-time: the average number of fixed weekly hours a person has worked in the previous 52 weeks, based on their average hourly rate
• No fixed hours, for example, casual work, including zero-hours contracts: a worker’s average pay from the previous 52 weeks, but only counting weeks in which they were paid, or rolled-up holiday pay, applying the 12.07% calculation.

 
The guidance reminds employers that, if they are considering changing to rolled-up holiday pay for their irregular-hours workers and/or part-year workers, it may amount to a contractual variation and so steps to address that should be taken. It also highlights the steps employers should take to communicate the use of rolled-up holiday pay and itemising it clearly on payslips. As already pointed out, employers should calculate rolled-up holiday pay using the worker’s ‘normal remuneration’ which could include regular payments, such as overtime, commission and bonuses.

 

How does overtime affect holiday pay?

Under the 2023 Regulations, holiday pay of full-year workers (four weeks of the 5.6 weeks’ statutory holiday entitlement) is to be calculated using their ‘normal renumeration’, and the other 1.6 weeks may be calculated using their basic rate of pay.

Conversely, irregular-hours workers and part-year workers, must have all of their 5.6 weeks’ holiday pay calculated using ‘normal renumeration’ irrespective of whether the employer chooses to pay rolled-up holiday pay or as a 52-week average.

Official guidance states that ‘normal remuneration’ includes commission or bonus payments, payments relating to professional or personal status relating to length of service, seniority or professional qualifications and other payments, such as overtime payments that the worker has regularly received in the 52 weeks preceding the calculation date.

As such, if an individual regularly gets paid overtime, commission or bonuses, the employer must include these payments in a minimum of 4 weeks of their paid holiday. However, only regular overtime, or other additional payments, that actually form part of a worker’s normal contractual expectation for pay, should be included in the holiday pay calculation.

Some employers might include overtime, commission or bonuses in the full 5.6 weeks’ statutory annual leave entitlement although they’re not obliged to do so.

Where an employer intends to pay the two different rates of holiday pay to a full-year worker, following the recent decision in Agnew, they must distinguish clearly between the two different holidays (that is, those making up the four-week-normal-remuneration holiday and those making up the basic-pay holiday of 1.6 weeks).

 

How does holiday pay work when an employee leaves?

When an individual leaves an organisation, employers are legally required to pay that worker for any accrued statutory leave that hasn’t been taken by the last day of their employment. This is referred to as ‘pay in lieu of holiday’, where payment in lieu is permitted only on termination of employment. Where the contract of employment provides for more than the statutory minimum, the contract should also make provision for what will happen to any contractual holiday built up by an employee once their employment has come to an end.

A worker will only be entitled to any unused accrued contractual leave if the employment contract makes specific provision for this. If the contract is silent here, and unless otherwise agreed between the parties, the employer is only required to pay that individual payment in lieu for any unused statutory annual leave.

When calculating the amount of holiday pay owed on termination of employment, this will depend on the amount of leave accrued, and used, in the context of the annual leave year, as well as the individual’s level of holiday pay based on the hours worked etc. There’s no automatic right to carry over unused leave into the following year, unless the employment contract allows for this. This means that any holiday pay entitlement will all depend on how much of the annual leave year has passed, what has already been taken, and whether the employee is contractually entitled to carry over unused leave from a previous year.

In the absence of any contractual agreement providing otherwise, any payment in lieu of unused holiday on termination of an individual’s employment can be calculated using the formula: (A x B) – C. Here, A is the minimum period of annual leave to which the individual is entitled; B is the proportion of the leave year that expired before the termination date; and C is the period of leave already taken between the beginning of the leave year and the termination date. Using this formula, if a worker has any spare holiday entitlement when they leave, the employer should pay them their equivalent daily pay rate for these days.

 

How should holiday pay issues be handled?

Paid annual leave is a basic legal right that an employer must provide. This means that if a worker is unhappy with their holiday pay, and any dispute cannot be resolved internally, it’s open to that individual to make a claim to an employment tribunal. Legal action can be extremely costly and time-consuming, so every attempt should be made by employers to resolve any dispute over holiday entitlement and holiday pay as quickly as possible.

The following tips on handling holiday pay issues will not only help employers to minimise the risk of legal proceedings, but maintain a positive working environment and employer brand:

Communicate your holiday pay policy clearly from the outset: as soon as you recruit a new employee, you should ensure that they’re aware of their annual leave entitlement, how paid leave accrues and how this will be calculated, so that there’s no confusion at a later date. By law, an individual’s contract of employment or written statement of particulars must specify the terms relating to holidays and holiday pay;

Define in writing when your annual leave year starts and ends: a leave year will often run for a normal calendar year, so from 1 January to 31 December, but if a leave year hasn’t been set, this will then start on the first day of an individual’s employment;

Ensure your holiday pay policy is easily accessible: you should put all your workplace policies in an employee handbook or download these onto the staff intranet, so that employees can remind themselves of their annual leave and holiday pay entitlement;

Provide a grievance procedure for holiday pay disputes: by having a clear written procedure for dealing with disputes about workplace issues, including disputes over annual leave entitlement and holiday pay, this will help to resolve matters internally without recourse to legal proceedings;

Include a clear holiday pay calculation in any final payslip: when you calculate a worker’s final pay packet, it’s important to be clear in their payslip how any pay in lieu of holiday has been calculated. In this way, the departing individual can cross-reference your calculations against their own to ensure that they’ve been correctly paid.

 

Holiday Pay Rules & Calculations FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.