Know how much holiday to give your staff

A worker's entitlement to paid annual leave starts on the first day of employment and is not subject to a minimum period of employment.

Holiday entitlement accrual

The Regulations permit an employer to operate a holiday accrual system for workers who are in their first year of employment (only). In practice, this means that a new worker will accrue one-twelfth of their annual holiday entitlement each month they are employed. This will apply from the start of each month.

Calculating holiday pay

For each week of leave accrued, workers are entitled to one week's normal pay. A week's pay is calculated according to the type of work carried out:

• for workers on fixed hours and pay, it equals the amount due for a week's work, averaged over the preceding 12 weeks
• for workers on fixed hours and variable pay (bonus, commission, or piece workers), it equals the average hourly rate (over the preceding 12 weeks) multiplied by the normal working hours in a week
• for shift workers, it equals the average weekly hours of work in the preceding 12 weeks at the average hourly rate
• for workers with no normal working hours, a week's pay is the average pay received over the preceding 12 weeks.

The 12-week reference period should be made up of 12 weeks in which pay was due to the worker. Any week in which no remuneration was payable to the worker should be discounted, as should any weeks where the employee was for any amount of time on sick leave, maternity leave, adoption leave, shared parental leave, parental leave, or paternity leave.

If any weeks are discounted, ie no pay was received for a particular week, or the worker was on statutory leave as outlined above, earlier weeks should be considered until you get as close to 12 weeks as possible. In these circumstances, the maximum period you go back is 24 weeks.

If the worker has been employed for less than 12 weeks, holiday pay is based on the number of complete weeks for which the worker has been employed.

Calculate holiday pay for hourly paid staff

To calculate the average hourly rate, you only count the hours where the worker was working and the pay that related to those hours.

Staff should receive the same pay during any holiday period as they would if they were at work. Therefore, when calculating holiday pay for the 4 weeks of paid holiday leave derived from European law, an employer must include payments which are intrinsically linked to the performance of tasks the employee is obliged to carry out under the terms of the contract. This includes commission, bonuses, regularly paid allowances, and payment for additional hours the employee normally and repeatedly works. Other payments, such as overtime payments regularly paid to the employee should also be included, as should payments for professional or personal status relating to length of service, seniority, or professional qualifications. Employers may decide to extend this calculation to the full 5.6 weeks statutory paid holiday entitlement, but they do not have to.

However, case law has suggested all paid annual leave should be treated as a composite whole where each day of a holiday a worker takes includes, on a fractional basis, the various elements making up their total holiday entitlement (whether they be contractual or statutory). Employers should take this into account when making holiday payments where they are only applying the law on overtime, commission, allowances, bonuses etc (as outlined above) to the 4 weeks of holiday derived from European law to ensure underpayments of holiday pay are avoided.

The question of how much pay a worker is due during a period of holiday can be complex and has been the subject of several court judgments. Further information is available from the LRA Workplace Information Service on Tel 03300 555 300.

Calculate holiday entitlement for your employees.

Payments for untaken statutory holiday

In the UK, the statutory annual leave entitlement is 5.6 weeks. A worker must take at least four weeks' paid holiday per leave year.

What a worker does with the remaining 1.6 weeks depends on their employment contract.

For example, you could allow them to carry those 1.6 weeks into the next leave year or state that all 5.6 weeks must be taken by the end of the leave year.

However, you cannot make a payment in lieu for any days that remain untaken. The only time you can make a payment in lieu of the statutory holiday entitlement is when the contract of employment terminates, and the worker has accrued entitlement to holidays and is unable to take them before they leave.

Payments for untaken contractual holiday

At the end of a leave year, you may find you have an employee who has some untaken contractual annual leave, ie annual leave over and above the statutory minimum of 5.6 weeks.

Depending on their employment contract, the employee may be entitled to either carry over the untaken days, or receive a payment in lieu of those untaken days.

When to pay workers their statutory holiday pay

Workers must receive their statutory holiday pay at the time that leave is taken.

It's, therefore, unlawful to not pay a worker while they are on holiday and pay them an allowance as part of their wages or salary instead - a system known as rolled-up holiday pay.