Taking a break is crucial for maintaining a healthy work-life balance. But understanding how holiday pay works in the UK can be a bit of a maze. Let’s walk through the essentials, from calculating your entitlement to the concept of unlimited holiday.
Calculating Holiday Entitlement
Statutory Minimum Holiday Entitlement
In the UK, workers are entitled to a minimum of 5.6 weeks of paid holiday per year, including bank holidays. For a full-time employee working five days a week or more, this equates to 28 days of paid holiday annually (28 days ÷ 5 working days = 5.6 weeks). This legal requirement ensures that employees get sufficient rest and recuperation time and correctly calculating holiday pay is vital to ensure fairness and avoid disputes. If a business offers more than 28 days leave, for example 32, the calculation to get equivalent weeks would be 32÷5 = 6.4 weeks.
But what if your working hours vary?
Formula for Calculating Entitlement for Irregular Hours Workers and Part Year Workers
Someone is an irregular hours worker if contractually the number of hours they work in each pay period is wholly or mostly variable, for example, zero hours contracts, casual or bank contracts. If someone’s hours are fixed under their contract, they will not be an irregular hours worker.
Irregular hours workers are still entitled to the equivalent of 5.6 weeks leave, but unfortunately, The Working Time Regulations do not set out how to calculate this entitlement into days or even hours. The key element is to calculate the average days or hours worked each week based on a reference period.
Recent legislative changes have strengthened protections for irregular hours workers and part year workers, ensuring they receive fair holiday pay based on their actual earnings, including any regular overtime or commission. 2023 saw the introduction of all irregular hours workers and part year workers being entitled to 5.6 weeks of leave after a Supreme Court ruling. In essence this meant that if workers were on a permanent irregular hours contract but only worked one week in the first week of the holiday year and didn’t work before or after that, they would be entitled to a further 5.6 weeks of holiday pay with each week being paid at the rate that what was paid in the week that they worked. If they earned £1000 for that week, they would still be owed £5600 in holiday pay despite not working all year!
Understandably this caused much controversy leading to more legislation to correct this.
Now, for holiday years starting in or after April 2024 employers can ‘roll up’ holiday and pay.
So, if someone is paid monthly, their entitlement (5.6 weeks) will accrue at 12.07% of that month’s hours. If weekly it will be 12.07% of that week’s hours.
This leads us to the explanation of how to calculate holiday for these types of workers.
Option 1.
(Average number of hours worked in a week over a 52 paid week reference period) x (5.6 weeks) = holiday entitlement (expressed as a number of hours)
For example, if you work an average of 20 hours per week, your annual holiday entitlement would be:
20 hours x 5.6 weeks = 112 hours of paid holiday
If an employee is on a zero hour contract some employers choose to only authorise full weeks off and .6 of a week. This way they can ensure employees get the time off and are paid 5.6 weeks at their average pay without the need to calculate individual entitlement.
Option 2. (Only for holiday years starting in or after April 2024)
12.07% of number of hours worked over a pay reference period (e.g. week or month) = accrued holiday entitlement (expressed as a number of hours)
For example, if you work 100 hours in a month, your accrued holiday entitlement will be:
12.07% of 100 hours = 12.07 hours rounded up to the nearest half (12.5) or full hour (13).
Full-time vs Part-time Employees
Differences in Calculation Methods
Full-time employees have a straightforward calculation based on their weekly working hours. However, part-time workers’ holiday entitlement is pro-rated based on the number of days or hours they work. It is important to note that legally an employee cannot have less than the equivalent of a full time employee, hence the need to pro-rate holiday.
Pro-rata Entitlement for Part-time Workers
A part-time worker’s holiday is calculated by multiplying their working days by the statutory entitlement:
Holiday Entitlement = Part-Time Days Worked Per Week × 5.6 (or other weekly equivalent if providing over the statutory minimum)
Rounding up to the nearest half day or day is common practice but rounding down would be against the law.
Example
A part-time employee working three days a week would get:
3 × 5.6 = 16.8 days of holiday per year, rounded up to 17 days.
Calculating entitlement in hours
To calculate leave in hours is relatively simple once you have calculated what the entitlement should be in days.
Holiday entitlement in hours = average number of hours worked per day × number of days entitlement
Example
A part time employee works on 3 days per week, Monday (6 hrs), Tuesday (6 hrs) and Wednesday (8 hrs) – so different hours on each day. In this case 20 hours a week over 3 days.
20 ÷ 3 = 6.66 average hours worked per day.
6.66 × 16.8 days of holiday per year entitlement = 111.88 rounded up to 112 hours
When calculating holiday in hours, do not round up the days entitlement, only round up the end of the equation, in this case the hours entitlement.
An alternative method is simply to multiply 5.6 weeks x hours in a working week. This should lead you to the same answer as above.
Calculating the entitlement in hours means that the correct amount of leave can be deducted depending which working day is being taken off.
Average Holiday Pay: What You Need to Know
Definition of Average Holiday Pay
‘Normal’ holiday pay includes all regular payments such as overtime and commission, not just basic salary. Payments related to length of service or professional qualification will also need including but one off bonus payments aren’t usually included. ‘Basic’ holiday pay does not include any of the above and is just the basic rate of pay. This distinction is important when calculating average pay as strictly speaking only 4 weeks of statutory entitlement needs to be paid at the ‘normal’ rate and the remaining 1.6 weeks can be paid at the ‘basic’ rate for regular hours workers. For irregular hours workers or those who work part of the year, all leave must be paid at the ‘normal’ rate.
To ease administrative burden, a lot of employers do not distinguish between the two types of rate and instead just pay the ‘normal’ rate for all holiday.
When and How to Use Average Pay Calculations
Average pay calculations are used when an employee’s pay varies, this does not necessarily have to be as a result of differing hours. Employers must calculate the average weekly earnings over the previous 52 weeks, including all regular and expected earnings.
As discussed earlier for irregular hours and part year workers entitlement / pay can be rolled up for holiday years starting in or after April 2024. Dependent on the arrangements for how you manage irregular hours and part year workers, if they are not paid for physically taking holiday, the 12.07% can be added to their pay on their normal pay day to take holiday into account without the need to try and calculate entitlements.
Example
£11.44 per hour and worked 50 hours in a pay period e.g. month/week
£11.44 × 50 = £572
£572 + 12.07% (£69.04) = £641.04
Overtime and Commission in Holiday Pay Calculations
When to Include Overtime and Commission
Regular and consistent overtime, as well as contractual commission, should be included in holiday pay calculations, when you have to pay ‘normal’ pay as described above.
Methods for Incorporating These into Holiday Pay
To incorporate overtime and commission, calculate the average earnings over the previous 52 weeks. This ensures employees receive fair holiday pay reflective of their usual earnings.
Rolled Up Holiday Pay
Rolled up holiday pay can be used as an alternative to average pay for irregular or part year workers. For holiday years starting in or after April 2024, it is allowable to pay 12.07% on top their normal pay during each period to take into account holiday pay.
This spreads payment out over the year instead of paying them when they actually take leave.
For example, if you earn £1000 for 1 months work with no holiday you will receive £1000 plus £120.70 (12.07%).
In the following month if you work for 2 weeks earning £500 and are on holiday for 2 weeks, you will receive £500 plus £60.35 (12.07%). Receiving no extra payment for holiday taken.
Its important to note, using this method employers must still ensure workers take the holiday they are entitled to. Holiday should still be encouraged for rest even if unpaid during that period.
Holiday Pay While Off Sick: Your Rights Explained
Employee Rights Regarding Holiday Accrual During Sick Leave
Employees continue to accrue holiday entitlement while on sick leave. They can choose to take their holiday during their sick leave or carry it over to the next year but they can’t gain both holiday and sick pay at the same time.
How to Handle Holiday Requests from Employees on Long-term Sick Leave
Employers should have clear policies for handling holiday requests from employees on long-term sick leave, ensuring compliance with legal requirements and supporting employee wellbeing. In some cases allowing holiday can promote a faster recovery and return to work.
The Rise of ‘Unlimited’ Holiday: How Does It Work?
The ‘Unlimited’ Holiday Concept
‘Unlimited’ holiday allows employees to take as much paid time off as they need, provided their work is completed. This approach aims to promote trust and flexibility, focussing instead on work output than amount of time working. It is important to note that the name is a misnomer because ‘unlimited’ can’t truly be unlimited because restrictions will need to be in place to protect the business. It becomes more about ‘not particularly counting leave’ rather than being ‘unlimited’ but even then there will be checks and balances.
Companies Implementing This Policy
This is more prominent in the US than here in the UK as they are the only country without a paid annual leave policy. This leaves paid leave in the hands of businesses who can determine how much paid leave they offer based on how competitive they want to be in the labour market. On average, full time workers in the US get 10-13 days’ paid leave and even that is after 12 months in work. For comparison in Europe, the countries with the most amount of leave are Andorra (45 days), Malta (41 days) and Estonia (39 days) with the UK still having over double that of the average worker in the US with 28 days.
The most high profile examples of companies that implemented this policy as you may already assume are from the US such as Netflix and LinkedIn. Both, believing employees should take ownership of the work and their time. Netflix have famously stated “just as we don’t have a nine to five policy, we don’t need a vacation policy”. Richard Branson also introduced it for Virgin Management in 2014 stating the decision would reflect an employee’s confidence that they were on top of their jobs, in complete control of all their projects, and that their absence would do no harm to the company – or their career.
Pros and Cons for Employers and Employees
‘Unlimited’ holiday sounds great and there are certainly benefits, however all things come with negatives.
Benefits and Potential Drawbacks of Unlimited Holiday
Pros:
- Increased employee satisfaction and retention for the people taking the leave
- Enhanced work-life balance
- Flexibility in managing personal commitments
- It can make employers more appealing in the labour market
Cons:
- Potentially cause anxiety due to not understanding what is an acceptable amount of leave
- Difficulty in managing workloads and performance due to inconsistent attendance
- There will be uneven usage among employees, with some not taking enough leave and others abusing it
- Increased stress on teammates who aren’t on leave
- Can make fulfilling legal requirements difficult
- It can’t actually be unlimited
It may work for some organisations but it certainly won’t work for others. There will always be a need to balance business needs and workloads which will necessitate control of annual leave. One of the ‘Unlimited’ holiday pioneers Netflix evidence this need in their ‘Work Life Philosophy’ where they state the following:
“We don’t set a holiday and vacation schedule, so you can observe what’s important to you—including when your mind and body need a break. Full-time hourly employees accrue 35 days annually for paid time off to be used for vacation, holidays, and sick paid time off.”
Implementing an Unlimited Holiday Policy
Steps for Introducing Unlimited Holiday
- Assess company culture and readiness
- Develop clear guidelines and expectations
- Communicate the policy to all employees
- Monitor and adjust as needed
Best Practices for Managing the Policy
- Encourage transparency and communication
- Set clear performance metrics
- Foster a culture of mutual trust and accountability
Summer Holiday Planning: Balancing Employee Requests and Business Needs
Strategies for Managing Increased Holiday Requests During Summer
Employers can manage summer holiday requests by planning in advance, staggering time off, and ensuring adequate staffing levels.
Ensuring Fair Distribution of Popular Holiday Periods
To ensure fairness, implement a transparent booking system and consider a rotational policy for popular holiday periods.
Managing Time Off During School Holidays
Special Considerations for Parents and Carers
Flexible working options and advanced planning can help parents and carers manage their time off during school holidays.
Flexible Working Options During School Holidays
Offering flexible working arrangements, such as remote work or adjusted hours, can support employees with children during school holidays.
Creating a Fair Holiday Booking System
Tips for Developing an Equitable Holiday Request Process
- Implement a first-come, first-served system
- Use a rotational policy for high-demand periods
- Ensure transparency in the process
Using Technology to Streamline Holiday Management
Employing HR software can streamline holiday booking and tracking, ensuring a fair and efficient process for all employees. Breathe HR is one great system used by 1000’s of SMEs and other organisations to store their HR records, manage HR admin and streamline processes such as requesting and authorising leave. You can set up a free trial of the system here.
Key Takeaways for Employers and HR Professionals
Summary of Main Points
Understanding and correctly managing holiday and the associated pay is crucial for legal compliance and maintaining an engaged and healthy workforce. There is a lot of information on holiday and with changes to the law this will always be a hot and confusing topic. Employers must understand that workers are entitled to a minimum of 5.6 weeks leave pro-rated for part time workers. Whether they have regular hours and pay or irregular hours and pay, it is vital that they receive the adequate time off and don’t suffer any detriment for taking it.
There may be new ways to manage holiday however these don’t come without a different set of challenges. If employers are willing to allow for example up to 35 days holiday a year, then rather than labelling it ‘unlimited’, just increase the holiday allowance.
Action Items for Ensuring Compliance and Employee Satisfaction
- Review and update holiday policies regularly
- Communicate clearly with employees about their entitlements
- Use technology to streamline holiday management
- Foster a culture of trust and flexibility with policies like unlimited holiday
- Encourage employee too take regular leave and monitor allowances to ensure they are being used
By staying informed and proactive, employers can ensure fair and compliant holiday pay practices, contributing to a positive and productive workplace. Happy holidays!
And Finally… A Summary of Recent Holiday Pay Rulings and Their Impact
Overview of Significant Court Decisions
There have been several recent changes to holiday pay and entitlement with most coming into effect for 2024 holiday years.
1. The definition of irregular hours workers and part year workers has been clarified.
2. Rolled up holiday has been made allowable for irregular hours workers and part year workers for leave years beginning on or after 1st April 2024.
3. From January 1st 2024, a worker is now able to carry forward over 4 weeks into the next holiday year if for example they didn’t take it and an employer didn’t advise them to take it or they may lose it.
4. Clarification of what constitutes ‘normal’ pay has been provided.
How These Rulings Affect Employers and Employees
1. The clear definitions provided make it a lot easier to distinguish between the different types of workers, therefore helping employers to ensure they are legally compliant.
2. Rolled up holiday being allowable is a bit of a reversion to what was established practice before. This affects both entitlement and pay calculations, the extent of which will be more apparent dependent on individual circumstances. Irregular hours workers and part year workers accrue holiday at 12.07% of their hours during a pay period for which they could gain additional pay should leave be taken. Alternatively, 12.07% can be added to their normal pay over the period without the need to pay extra for holiday taken. Either way the entitlement to the paid time off doesn’t change.
3. All workers will be entitled to carry forward over four weeks into the next year that they should have been entitled to take if:
· they have been refused pay for their paid leave entitlement
· they have not been given a reasonable opportunity to take their leave and been encouraged to do so
· they have not been overtly informed that untaken leave must be used before the end of the leave year to prevent it from being lost, or
· they have not been able to take leave due to illness
4. Workers are entitled to 5.6 weeks of paid statutory holiday per year, at least 4 weeks of this must be paid at the ‘normal’ rate. This now includes:
· payments, including commission payments, intrinsically linked to the performance of tasks which a worker is contractually obliged to carry out
· payments relating to professional or personal status relating to length of service, seniority or professional qualifications
· other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date
If you want to know more or need any support, please get in touch with us today.