All staff members are eligible for annual leave. According to the UK Working Time Regulations, your employees are entitled to at least 5.6 weeks of holiday leave every year, including public holidays. It’s a legal requirement for employers to provide their fair remuneration during the holiday period as they would get on regular workdays.
The calculation of holiday pay can be easy if they have fixed working hours and income. But employees in other categories are treated differently.
The rapid regulatory changes also add to the complexity, and employers now have to consider numerous additional elements as they work out a staff member’s holiday remuneration. Simply put, you now have to include regular overtime and regular commission payments when computing our workers’ holiday pay.
This detailed guide outlines the different ways of calculating holiday pay, including zero-hour contracts and the different types of overtime.
How to Calculate Holiday Pay for Employees with Fixed Hours and Salary
This calculation is usually based on the employee’s normal pay rate. It doesn’t matter whether they’re working full-time or part-time, provided their working hours do not vary; you’ll use their regular rate.
For instance, consider a worker who completes 37 working hours every week and earns a weekly income of £600. When they take a one-week holiday, you must pay them £600 as they holiday remuneration.
What If It’s an Employee’s First Year of Employment
How do you calculate an employee’s holiday pay if they haven’t completed their first 52 weeks? In this case, you should consider the number of full weeks the staff member has been employed in the company.
For instance, if the worker has been around for 31 full weeks, you should compute the average pay they earned during the duration, then use this value as their holiday pay.
How to Calculate Holiday Pay for Employees with Zero-Hour Contracts, Overtime, Commissions or Bonuses
Calculating the holiday pay gets more complicated for employees without fixed hours or a fixed salary, as they don’t earn the same weekly amount. In essence, their holiday pay should equate to what they would have earned if they had been working.
Several changes have since been implemented on these regulations and have been effective in UK law since 6th April 2020. Read on for guidance to determine how employers can compute overtime and other benefits that contribute to the holiday pay.
How to Calculate Holiday Pay for Zero-Hour Contracts and Shift Workers
Workers without fixed hours are entitled to a week’s pay for each week of statutory leave they take.
To calculate holiday pay for these zero-hour contracts and shift workers, you should follow the Government guidelines for the holiday pay reference period, usually 52 paid weeks, to ascertain what this worker should earn.
Calculating Overtime in Holiday Pay
Overtime can be referred to as the additional hours worked over the company’s usual full-time requirement. For employees with fixed working hours, any added working hours are considered overtime.
Several recent legal cases show that overtime must be considered in a worker’s holiday pay.
According to EAT’s decision in Hertel (UK) Ltd v Woods and others, a worker’s weekly pay must include the organisation’s standard overtime hours. This applies even if the business has no obligation to provide a minimum. The Court of Appeal also confirmed that the regulation also binds voluntary overtime.
For instance, if employees earn from voluntary overtime as part of their regular work pattern, the amount is considered “normal remuneration”.
Employees are entitled to the following types of overtime payments in their holiday pay:
- Guaranteed overtime – This is where you, the employer, have a contractual obligation to delegate the additional work, and the worker is obliged to accept the task. For instance, if you know you have work to be submitted on a particular monthly deadline, your worker’s contract should have an express clause stating that they’re obliged to meet the specific overtime deadline.
- Non-guaranteed overtime – This is where you’re free to grant or deny overtime to a worker, but when you offer it, they’re obliged to accept it. This applies to when you’re anticipating a busy season during some months of the year yet don’t know the exact overtime necessary to complete the demand. The contract will state that the employee will work overtime, usually based on the company’s needs.
- Voluntary overtime – This is where you aren’t obliged to offer overtime work hours, and the worker has no obligation to handle the extra work. It’s them to decide whether they’ll do it. However, employees should not receive unfair treatment because they rejected voluntary overtime. Usually, this applies when you’re suddenly understaffed, and need to meet customer demand.
Calculating Bonuses and Commissions in Holiday Pay
The principle for holiday pay factoring bonuses and commissions is the same as with overtime payments – that the worker should be in the same financial position as they would have been had they not taken leave.
Therefore, if you’re regularly paying commission or bonuses in addition to basic pay, you must factor these into the workers holiday pay. Conversely, discretionary annual bonuses are unlikely to fall within the scope of “normal remuneration”.
Several crucial cases outline the various payment factors that should be treated as normal remuneration when calculating holiday pay.
- Williams and others v British Airways plc 2011
- The ECJ (European Court of Justice) held that any payment component related to a worker’s task performance must be part of the holiday pay calculation.
- Lock v British Gas Trading Ltd 
- The ECJ held that a worker’s holiday pay must include all payments representing the commission they would have earned on a standard working period.
Holiday Pay on Furlough: How to Calculate Holiday Pay and Entitlement for Employees on Furlough
In essence, furlough generally refers to a temporary absence from work or leave. This may be a result of a company’s economic complexities or a national matter. Initially, this expression didn’t mean much in the country’s employment legislation, but it was temporarily introduced to respond to the coronavirus pandemic’s unprecedented situations. Notably, the scheme doesn’t change the ground rules of employment law but supplements them.
According to furlough considerations, employees can rightfully accrue or build up holiday entitlement during a temporary leave due to the COVID-19 pandemic. They also have the right to take leave during this period.
The Bottom Line
Your employees are entitled to claim fair holiday remuneration as they would earn during other days at work. Follow the guidelines above to help ensure you’re calculating holiday pay correctly, but these examples are not definitive.
If you have any questions or need help calculating holiday pay for your workers and employees, please don’t hesitate to get in touch. Working with our payroll experts will help reduce the burden and ensure you’re RTI compliant. We can also assist with your pension obligations, so you’re free to handle other areas of your company.