An Employer’s Guide to Holiday Pay

Holiday pay in employment law can seem like a minefield, and as laws and regulations are changed – including as recently as January 2024 – it can be difficult to keep up with all that you need to know. 

It’s also one of the areas of Employment Law where employees research their rights most, so it’s really important that you make sure that you’re paying the right amount to each and every worker and employee. So, here’s your ultimate guide to Employment Law holiday pay.

What does holiday pay include?

If an employee has regular hours and receives the same rate of pay for these regular hours throughout their working week, then at least four weeks of their holiday pay should be calculated as basic pay plus:

• Any ‘normal’ overtime worked
• Any commission received linked to the performance of the role  
• Any other allowance which is intrinsically linked to the performance of the role, e.g. bonus or travel time payment.
• Any payments which relate to a worker’s personal and professional status, e.g. an uplift payment for a particular qualification.

It’s possible to pay the remaining 1.6 weeks (and any additional holiday given) at just basic pay, but it can be complicated to sort these holiday periods separately.

If someone has irregular hours, or their pay varies depending on when they work their regular hours or how much work they do, then how to work out holiday pay needs to be done a certain way. All their holiday pay (i.e. the full 5.6 weeks) is calculated as an average. This average takes into account any payments received for hours worked, including any commission, bonuses etc. over the 52 worked weeks before the holiday.  

If no work is done in a particular week, then this week is ignored.  If the person has not yet worked 52 weeks, an average of the weeks worked is used in the calculation.

On 1 January 2024, new holiday legislation was introduced.  It gave a number of new options for dealing with holiday for part-year workers/employees and irregular hours workers/employees and applies for holiday years starting on or after 1 April 2024.  Part-year workers are those who for at least a week a year have unpaid time off, e.g. a term-time only worker.  Irregular hours workers always or mostly have varying amounts of paid hours each pay period, e.g. a zero hours worker. 

The legislation states that an employer can choose to state for part-year workers and irregular hours workers:

• That they only accrue holiday when they work.  This means they wouldn’t accrue any holiday during weeks where they don’t do any work and has the effect of pro-rating their holiday.  
• That throughout their employment, i.e. not just the first year, they can only take holiday once it has been accrued.
• That they are paid rolled-up holiday pay.  Rolled-up holiday pay means paying an uplift to pay each pay period, representing holiday pay.  The minimum uplift would be 12.07% based on a 5.6 week holiday entitlement.  If more holiday than 5.6 weeks is given then the uplift should be adjusted accordingly, e.g. if 6 weeks holiday is given, the uplift would be 13.04%.  

If you want to use any of these new options for existing part-year/irregular hours employees, it’s important to get advice on consulting with them first about the changes proposed and also if they don’t agree to the proposals.

How overtime is calculated

There are a number of different types of overtime. If overtime is ‘regular/normal’ and forms part of a worker’s ‘normal’ contractual expectation for pay, then it should be included in the holiday pay calculation.  This is regardless of whether it’s guaranteed overtime or voluntary overtime.

Voluntary overtime explained

As we’ve said, if overtime is ‘regular/normal’ and actually forms part of a worker’s ‘normal’ contractual expectation for pay, then it should be included in the holiday pay calculation – whether it’s guaranteed overtime or voluntary overtime.

However, if overtime is truly sporadic and does not form part of the ‘normal’ hours and regular pay, it doesn’t need to be included as part of holiday pay.

Holiday pay when leaving a job

If an employee is leaving, their holiday entitlement is adjusted pro-rata in line with their leaving date. You then need to figure out whether they’ve overtaken or undertaken their holiday, based on their contractual entitlement. If an employee has undertaken their holiday, then you need to pay ‘in lieu’ in their final pay for this untaken holiday entitlement. If they’ve overtaken, then you should be able to make a deduction.

Usually pay in lieu can only be paid for holiday when someone leaves. However, new laws have now introduced an option of rolled-up holiday pay for some workers, as set out above.

Can I deduct holiday pay if the employee took additional holiday days?

Yes, there are protections in place for employers to deduct holiday pay from the final pay if your employee has: 

• Taken more holiday days than they have built up 
• Their contract stipulates that a deduction can be made for overtaken holiday.

This means there must be a provision in the contract of employment or a written agreement that states deductions can be made for overtaken holiday. 

It’s important to carry out due diligence and make sure that you’re happy with the wording of any contracts in relation to holiday and holiday pay. You should also have rules in place about when and how an employee can book off holiday – for example, you could restrict holidays to only a certain number of colleagues being off at the same time, or state that in a particularly busy month (e.g. December), no holidays can be taken. 

If I have a new employee starting, what holiday pay are they entitled to?

An employee’s holiday entitlement in their first year will depend on when they join your business. For example, if an employee joins you at the start of your holiday year, they’d be entitled to the full year’s allowance. However, if they start a quarter of the way through the year, they’ll be entitled to one-quarter of their allowance, and if they started halfway through your business’ holiday year, they would only be entitled to half of their allowance… so on and so forth. 

There are rules in place to prevent employees from exhausting all their holiday allowance as soon as they start working for you, and then leaving the business. The rule stipulates that the right to take holidays in the first year of employment is accrued at a rate of 1/12th of the annual entitlement on the first day of each month of that year.

What happens if I sack an employee, do they still get holiday pay?

It may feel a bit unfair, but employees are still entitled to their full statutory holiday entitlement for accrued but untaken leave, even if they’re sacked for gross misconduct.  However, this would still be calculated pro-rata to their termination date.  

If you give more than 5.6 weeks holiday a year, it’s possible to put in place contractual rules that apply to any additional holiday. For example, if you give seven weeks holiday a year, you could state that if an employee is dismissed for gross misconduct, then they lose their right to their additional 1.4 weeks holiday.

Manage holiday pay properly with our guidance

Employment law holiday pay can be difficult to stay on top of. As an employer, you need to make sure your employee holiday pay includes the items discussed in this blog post, or risk being claimed against. Keep in mind the following points:

• Whether voluntary overtime is part of ‘normal remuneration’
• How to identify which days fall within the basic entitlement for 20 days/four weeks’ holiday.  The law distinguishes between the 20 days/four weeks based on EU law, not the additional 8 days/1.6 weeks based on UK law.
• What reference period should be used for commission, bonuses and other allowances, i.e. how do you deal with quarterly commission or annual bonuses, etc., and how do you factor these into the calculations?
• Over what period must a payment be made for it to be considered part of ‘normal remuneration’, i.e. how many overtime shifts or commission payments must be recorded?
• Do you want to introduce any of the new rules for part-year or irregular hours workers/employees? If so, ensure you get advice on consultation for existing employees.

Whether you need help working out holiday entitlement or just need to keep track of who’s off and when, Citation can be by your side.

Managing holiday requests is made super simple with our online hub, Atlas. In just a few clicks your people can fire their holiday requests over to you and in one click, you can approve, decline, and manage. Plus, you can use Atlas to create policies, handbooks and more – it really is the platform that does everything!

And it’s not just about tech! Working with us means you have access to our 24/7 advice line, so you can speak to a team of HR experts in a matter of minutes for answers to any of those tricky questions, no matter the time of day or night.

Want to make our team part of your team? Contact us today, or fill in the form on this page and let’s have a chat about how we can help. Our HR consultants are ready to help! Why not take a look at our HR and Employment Law package to support your business?