How to calculate holiday pay in 2021: an update on legislative changes

8 March, 21

For many businesses, calculating holiday pay is a straight-forward process. Employers are, within the parameters of the law, able to dictate how many annual leave days or hours a staff member is entitled to.

When the individual chooses to take their allotted time off, they simply get paid as normal.

However, in some industries the process is far more complex, with many individuals working varied hours depending on their individual contracts. In many cases, particularly within the manufacturing and engineering sectors, this includes irregular shift patterns and overtime.

Whilst this means that calculating each staff member’s holiday pay individually may seem complex or time-consuming, it is vital that it is calculated correctly. Incorrectly calculating holiday pay is an unlawful deduction of wages and can result in expensive claims that can be backdated by up to two years.

Following an amendment to a crucial piece of legislation in April 2020, many employers are still at risk of accidently miscalculating renumeration for leave. In this article, the Banner Jones Employment Law team bring you up to date on the major changes you need to be aware of regarding the reference period of calculating holiday pay.

We also answer your most commonly asked questions to make sure you’re fulfilling your legal obligations and also paying your team fairly.

Do I need to work out each of my employees’ holiday pay individually?

Yes, you do. As time consuming as it may be, there is no “one size fits all” when it comes to holiday pay and you should work out how much each member of staff is entitled to on an individual basis.

For those on fixed hours and pay, a week’s holiday pay will simply be equivalent to a week’s wage.

However, holiday pay for those who work shifts should be calculated as the average number of weekly fixed hours they have worked in the previous 52 weeks at their hourly rate.

If your staff have no fixed hours because they are casual or hold a zero-hours contracts, then their holiday pay will be based upon their average pay from the previous 52 weeks, only including the weeks they were paid.

I thought holiday pay average was based on a 12-week period, what changed?

On 6th April 2020, an amendment to the Employment Rights Regulations 2018 was introduced which changed the reference period for calculating holiday pay. While the average wage used to be based upon 12 weeks, it should now be based upon 52 weeks of pay.

If your employees work more or less hours in different seasons of the year, this could quite dramatically affect how much holiday pay they are entitled to. It is important that an employee or worker is not placed at a financial detriment for taking holiday.

Note, that if your employee was not paid at all in any of the 52 weeks, you should count back to the weeks they were paid, up to a maximum of 104 weeks from the date they want to start their holiday. You should be basing your average on a total 52 weeks in which the employee received payment, but they need not be consecutive.

How do I work out a week’s pay if my staff are paid monthly?

For those employees who work the same hours and receive the same pay, you can calculate a week’s pay by multiplying their monthly pay by 12 and then dividing by 52.

Alternatively, you can calculate their hourly rate by dividing their month’s pay by the number of hours worked. Then, multiply the average hourly pay by the number of hours they work per week.

What if my employees earn commission, receive bonuses or work overtime?

If your employees earn commission or bonuses, you should include this in your calculations for holiday pay. It is not enough to base renumeration on your staff member’s basic salary; it should also take into consideration any additional payments that they receive on a regular basis.

This is also the case for overtime. Whether compulsory or voluntary, you should factor in any additional hours when calculating your employees’ average rate if the overtime is worked on a regular basis. You do not need to include voluntary overtime that is only worked very occasionally.

Should I include holiday pay in my workers’ hourly rate?

You should no longer calculate what’s known as “rolled-up holiday pay”, where you include holiday payment, in hourly rates. Instead, you should only pay holiday for the worker’s period of annual leave. The law only allows you to pay accrued, untaken holiday on termination of the individual’s employment.

What else do I need to be aware of when calculating holiday pay?

It is important to remember that calculating holiday pay correctly is a legal obligation. If you disadvantage employees or workers by how you work out their renumeration, you could find yourself in hot water.

We have seen a number of cases in which staff have taken legal action against their employer for an unlawful deduction of wages.

If your calculations leave several workers out of pocket, then you could face a group action with a threat to your company reputation as well as your compliance with the law.

We’re here to support you. If you have any questions surrounding holiday pay or need help with re-negotiating an out-of-date employment contract, please contact the Banner Jones Employment Law team.

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