What Is Holiday Pay?

What Is Holiday Pay?

All employees with a contract of employment are entitled to receive an allowance for holiday pay or annual leave.

Its purpose is to ensure that workers do not suffer financial detriment for taking a holiday or vacation. In principle, workers should receive the same amount of money while on holiday as they would if they worked their usual hours.

Holiday pay accrues from an employee’s first day of employment. It continues to build up during periods of sickness absence, maternity and adoption leave, parental leave and statutory leave.

Holiday pay can be used while an employee is absent from work due to sickness or incapacitation.

During the first year of employment, employers can restrict an employee to taking only 1/12th of their holiday entitlement during each month of service.

This will ensure that an employee does not simply use up all of their annual leave and then decide to leave the business. Any such limitations must be set out in the employee’s contract of employment.

In most cases, annual leave cannot be carried over from one leave year to the next. However, if an employee has been absent due to long term sickness and therefore unable to enjoy the benefit of their annual leave, they can carry it forward into the following leave year.

Holiday pay entitlements vary between countries, but in general, employees who commit to working a certain number of hours of work are entitled to receive paid time off in return.

Holiday pay describes the sum of money paid to employees taking their statutory leave entitlement. If you work a set number of hours each week, this usually means you will receive the same amount of money for a holiday week as you would normally.

In the UK, the right to paid holiday was brought in following the publication of the Working Time Regulations 1998.

The statutory holiday entitlement is a minimum of 5.6 weeks. For full time workers, this equates to 28 days of paid annual leave. Part time workers receive a pro-rata holiday allowance, depending on the number of hours that they are employed to work each week.

Bank Holidays and Public Holidays

In England and Wales, there are eight public or bank holidays per year. If staff are required to take leave on these days (for example, if the business is closed), the employer can reduce the total number of paid leave days for full time workers to 20 days.

Employers do not have to offer paid leave for bank holidays, but if an employer chooses not to, they must offer 28 days of paid annual leave to full time workers.

Employees do not have the right to take bank holidays off if the business is open as normal; however, they do have the right to request time off in the usual way.

If a business closes down between Christmas and New Year every year, the employer can force employees to use their annual leave entitlement to cover these days.

Contractual Holiday Entitlement

Some employers choose to give staff a more generous holiday entitlement. This is referred to as contractual holiday entitlement, as it is detailed within the contract of employment.

If you are employed in the United States, you should always check your employment contract to find out your holiday pay entitlement. In some US states, employers can withhold legal paid holiday entitlement for up to a year following the start of your employment.

For example, in the state of California, there is no legal requirement for employers to offer paid or unpaid leave for vacations. However, if an employer chooses to publish a policy, practice or other agreement to offer paid vacation, it must comply with certain restrictions.

In line with California law, vacation time that is earned is classed as wages, and it is accrued as labor is carried out.

If an employee is entitled to three weeks (15 work days) of vacation time each year, after six months of work they will have earned 7.5 days of vacation time.

Vacation pay cannot be forfeited, even if the employee chooses to leave the business before taking it, regardless of the reason for leaving.

Holiday pay laws vary between states, so it is important to research your vacation pay entitlements before accepting a job offer.

Who Is Entitled to Holiday Pay?

Your employment status determines your entitlement to paid holiday.

Generally speaking, all workers are entitled to holiday leave, although some types of worker will have fewer rights than employees.

In many cases, people employed within the gig economy are legally considered to be workers, so they are entitled to pro-rata holiday pay, according to how many hours they have worked within the applicable reference period.

Employers should develop a holiday pay policy to set out annual leave entitlements. This will ensure a transparent approach for managing holiday arrangements across the business.

How Is Holiday Pay Calculated? (With Examples)

In recent years, there have been a number of UK legal cases relating to holiday pay. The outcomes of these cases have confirmed that commission and normal (regular or guaranteed) overtime pay should be included within the calculations for holiday pay.

In the UK, the calculation for holiday pay is complex. Different rules apply for the first four weeks of holiday pay and the additional 1.6 weeks of holiday pay. This is due to the decisions reached in European court cases, which only affect the four weeks of holiday pay set out within European law.

When paying an employee for the four week holiday entitlement under European law, employers must include:

• Normal wages/salary
• Compulsory or guaranteed overtime
• Commission-based pay
• Bonuses
• Travel allowances (excluding expenses)
• Shift allowances (if applicable)
• On-call payments

For the additional 1.6 weeks, the calculation is not as generous. This element of leave is based on your normal working hours and whether your pay varies from week to week.

If your weekly pay changes depending on the number of hours that you work, your holiday pay should be calculated using a 52-week reference period.

This means that your entitlement will be worked out based on the 52-week period prior to your holiday (or your entire employment period if you have been employed for less than a year).

Normal pay refers to the sum of money received in exchange for a normal working day, excluding any payments not received on a regular basis.

To work out your pay for a normal working week, multiply your hourly rate by the number of hours worked.

For example:

Hours worked per week: 40
Hourly rate: £15
Weekly pay: £600

Hours worked per week: 20
Hourly rate: £15
Weekly pay: £300

To calculate a casual worker's entitlement to holiday pay, you will need to consider their earnings during the past 52 weeks. For example:

Robin works irregular hours for a retail store. During the last 104 weeks, he has received pay during 53 of them. Since Robin has worked more than 52 weeks within the last 104, his holiday pay is worked out by taking his average earnings during the most recent 52 weeks worked.

When working out Robin’s entitlement, the employer must discount weeks 7, 36 and 46, as he did not work any hours or earn any money during those weeks.

Since three weeks need to be discounted, the employer must look back a further three weeks in order to consider the full 52 weeks of pay data needed to calculate holiday pay. These extra weeks are weeks 54 to 56 in the table above.

To calculate Robin’s holiday pay, the employer will need to sum up the pay received for each week:

(1 x £250) + (5 x £400) + (1 x £100) + (17 x £200) + (10 x £250) + (9 x £300) + (6 x £300) + (4 x £250) = £13,750

The total can be divided by 52 (weeks of data used), in order to work out the weekly average:

£13,750 / 52 = £264.42

A week’s holiday used during the following week would be paid at a rate of £264.42.

In line with the EU Working Time Directive, if an employee receives regular paid overtime, commission or bonuses, employers must take these payments into account when calculating the first four weeks of paid holiday.

In some cases, employers will also take these payments into account when calculating the additional 1.6 weeks of holiday pay, but they are not obliged to.

Holiday Pay and Commission

Jane works full time hours in a sales role. She is entitled to a basic salary of £25,000, 5% commission on sales and a discretionary performance bonus each quarter if she achieves her targets. Since Jane receives commission and bonuses, her earnings are different each week.

For her holiday pay, Jane must receive an average of her last 52 weeks’ pay for each period of annual leave.

For the first four weeks of her holiday pay (i.e. the EU Working Time Directive element of her entitlement), Jane must receive her basic pay, plus any commission linked to her performance, plus bonuses.

For the remaining 1.6 weeks of her holiday pay, she is only entitled to receive her basic salary – although this is at her employer’s discretion.

Holiday Pay and Overtime

Eleanor is a nurse. She works day and night shifts, receiving different rates of pay. She is contracted to work 20 hour per week, but she regularly works an additional eight hours as overtime.

When calculating Eleanor’s holiday pay for the EU Working Time Directive element, she should receive an average of the last 52 weeks pay for each period of annual leave, including overtime worked.

This is because her overtime hours are regular. For the remaining 1.6 weeks of her holiday pay, Eleanor is only entitled to her basic salary.

If overtime is ad-hoc, it does not form part of an employee’s regular working hours and pay. This means employers are not obliged to include it as part of the employee’s holiday pay.

Final Thoughts

Wherever you live and work, holiday pay is a complex matter for employers and employees alike.

For employers, setting up routine tracking on what counts as ‘normal pay’ is a helpful way to manage it.

As an employee or worker, you should always read your contract and regularly check your pay packet or wage slip to ensure you are receiving the holiday pay you are entitled to.

When looking at your paycheck, note that holiday pay is unlikely to appear as a separate item. Most employers include it as part of your regular pay, and you are expected to know that it is aggregated as part of your wages or salary.

If you believe that your employer has not paid you the correct amount of holiday pay, you can make an employment tribunal claim for unlawful deduction of wages under the Working Time Regulations.

Before raising a dispute, you should submit a formal grievance to your employer to discuss whether the issue can be rectified informally. If not, you should follow the ACAS Early Conciliation process.