Calculating holiday pay

How to calculate holiday pay

As employees it is very easy to assume that your employer has paid the correct remuneration as they know how to calculate holiday pay. In reality, there are occasions where errors occur, disputes emerge and incorrect payments are made.

While calculating holiday pay should be relatively straightforward, it is still important to check that you are being paid the correct rate when taking paid holidays.

What is your holiday pay entitlement?

Legally you are entitled to what is known as “statutory paid holiday”. In simple terms this means that for every week of statutory paid holiday you should receive a week’s working pay. Things can get a little more complicated when calculating your normal week’s pay. There are two main areas to look at which are:-

  • Fixed contracted hours
  • Set amount of remuneration each week

Traditional fixed contracted hours tend to be eight hours, 9 AM to 5 PM each working day. In recent times we have seen an increase in what is known as shift-work. This tends to involve a set number of hours per week but no fixed working day. For example, you may work part of the week on day shift and part of the week on night shift. However, your remuneration will be the same each week.

So, how to calculate holiday pay various scenarios?

We will now take a look at the various remuneration scenarios and what you should receive as your statutory holiday pay.

Fixed hours, constant level of remuneration

Where your hours are fixed, and you receive a constant level of remuneration, this is the level of holiday pay you should expect. For example, if you earn £500 per week then that is what you should receive for one week’s holiday, or on a pro-rata basis.

No fixed working hours

Commonly referred to as “zero hour contracts” there are many people who work on no fixed working hours, as such. This then begs the question, how do you calculate your holiday pay entitlement if you have no set hours. There are a number of ways in which you can calculate your entitlement:-

  • Your holiday entitlement will be based on your average weekly pay over the last 52 weeks. So, simply add your remuneration over the period and divide by 52.
  • It is important to note that this figure should include overtime, commission and any bonuses paid.
  • If for example you did not work for two weeks over the last 52 weeks, then you would need to go back an additional two weeks until you had 52 weeks of working data. Then it is simply a case of calculating the average weekly pay over that 52 week period.

As you should be provided with regular wage slips, you should have all of the information required to hand. In the event that you do not have the relevant information, you can always request this from your employer.

Lack of relevant data for 52 week period

There will be occasions where for example individuals have been on long-term sick and may not have worked over the last 52 weeks. Alternatively, it may be that the duration of your employment has not yet reached the 52 week mark. There are a number of factors to consider in this scenario:-

  • If your previous 52 weeks of work time create an unfair reflection of your remuneration you can argue for a different period.
  • Where you have been off sick or received no working hours under your zero hours contract, you are allowed to work backwards. You can use remuneration figures for a maximum of 52 working weeks.
  • For those beginning employment within the last 52 weeks there may not be sufficient data for a full 52 week average calculation. Any holiday entitlement calculations should be carried out on a pro rata basis. So for example, if you have worked 40 weeks then take the 40 week average of your remuneration.

Where it is not possible to gather data covering 52 weeks, or some of the data may not reflect your current situation, you may need to negotiate with your employer. These can be somewhat fraught negotiations because your employer will be looking to minimise your holiday pay entitlement. If you believe that your employer is being unfair then you should take professional advice.

Fixed hours but varied remuneration

Many people work in an environment where their hours are fixed but they may involve overtime, commission and bonuses. Calculating working hours in this scenario can be some of the most challenging calculations as part of the analysis can be open to interpretation. The issue revolves around “normal” remuneration including overtime, commission and bonuses.

  • You should only include “regular” overtime which has occurred over the last 52 weeks. Overtime once every couple of months is irrelevant whereas overtime in six out of the last eight weeks is more reflective of your current situation.
  • The calculation should include accumulated remuneration over the last 52 weeks and then divide this by 52 for your “normal” weekly pay. If this is reflective of your current situation, this should be used as your benchmark.
  • If you feel that the 52 week period does not reflect your current situation, you can ask your employer to use remuneration over a different period. Again, this is open to a degree of negotiation and is something of a grey area.

Legally, your employer is obliged to include overtime, commission and any bonuses paid for the first four weeks of your holiday pay. Quite how these figures are calculated can vary significantly as we have detailed above.

Fixed hours but different hourly rates of pay

While there is a set minimum wage per hour for different age groups, different shifts can often lead to different rates of hourly pay. As a consequence, calculating holiday pay entitlement will be slightly different:-

  • Add together your full remuneration including commission, overtime and bonuses over the last 52 working weeks. Divide this figure by 52 for your average weekly pay.
  • Add together your full working hours over the last 52 weeks. Divide this figure by 52 for your average weekly hours.
  • If you divide your average weekly pay by your average weekly hours, this will give you your average hourly rate of pay.
  • Use this average hourly rate of pay to calculate your holiday pay entitlement. For example, if you take one week’s holiday and work on average 37.5 hours a week, simply times this by your average hourly rate.

This calculation is a little more complicated, but it does give you an average hourly rate of pay on which you should calculate your holiday pay entitlement.

Fixed hours on piecework basis

While not as common as it used to be, piecework is an employment arrangement where your remuneration will depend upon the number of tasks you complete. For example, a farm labourer may be paid on the amount of crops that they are able to harvest. The calculation in this scenario is as follows:-

  • Add together your total remuneration over the last 52 working weeks then divide by 52 for your average weekly remuneration.
  • If you then divide your average weekly remuneration by your weekly fixed hours, this will give you your average hourly rate.
  • Then simply multiply your hourly rate by the number of hour’s holiday taken, to arrive at your holiday pay.

If you’re looking to clarify your correct holiday pay it is important to retain all of your wage slips. Even though this information should be available from your employer, it does no harm to maintain your records going forward.

Rolled-up holiday pay

If you began working for your current employer recently then you are unlikely to have come across the term rolled-up holiday pay. Some older employment contracts were legally able to use this method. It simply allowed employers to add an element of holiday pay into your hourly rate; therefore you would not be paid when you were on holiday. This arrangement was more common with agency and zero-hours contract workers but is now illegal.

There is guidance on the UK government website which clarifies that any employment contract with rolled-up pay should be renegotiated as soon as possible. If your employer fails to take action, you may need to consider a formal grievance.

What to do if your holiday pay is incorrect

As with any employee/employer disagreements, the first action should be an informal approach to alert your employer of a discrepancy in your remuneration. In the majority of situations, where your calculations are correct, your employer will likely agree to adjust your remuneration accordingly.

When approaching your employer it is important to have the relevant information and calculations to hand. It may be that your employer has failed to include commission, bonuses and overtime in the average payment calculations. In some cases there may be a legitimate difference of opinion as there are some grey areas. On occasion both parties may need to approach an independent third party to make an unbiased ruling.

If you have suggested/attempted a conciliation service to no avail, or you still believe that your employer is being unfair, you can take legal action.

Knowing your rights regarding holiday pay

While there are different ways of calculating average remuneration, average hours and your average hourly rate, all of these processes have a degree of common sense. There are some grey areas which may require a degree of negotiation, but that does not mean giving in to your employer’s demands. If you have the data and the calculations to prove your case, you are entitled to take this disagreement to court.

Unfortunately, the more protracted the process and greater the difference in opinion, the more impact this can have on an employer/employee relationship. Many employers and employees will seek to find a balance between different opinions, thereby helping to retain a long-term working relationship. In a perfect world, this is the best option for all concerned.