Holiday pay is a fundamental element of employee remuneration. Understanding the legal framework underlying this statutory benefit help employers to pay fair compensation to their staff.
The legal framework governing holiday pay and overtime pay has been influenced by evolving statutory regulations and case law.
Legal framework
Employees have the right to statutory annual leave, whether they work full-time, part-time or under a zero-hours contract.
The number of days’ holiday entitlement will depend on how many days or hours the employee works, and the contractual arrangement they have with their employer.
Full-time employees
By law, full-time employees are entitled to a minimum of 5.6 weeks’ (28 days) of statutory paid annual leave per year, which is inclusive of public holidays.
Employers may also give their employees enhanced holiday entitlement.
Part-time employees
Employees who work part-time are entitled to a minimum of 5.6 weeks’ (28 days) of statutory paid holiday. The entitlement however will be in proportion to the hours they work.
If an employer gives full-time employees more paid holiday than the legal minimum, they must also give part-time employees more than a legal minimum.
Calculation of holiday pay
If an employee’s working hours do not vary, their holiday pay will be calculated using their usual pay rate. This is the case regardless of whether they work full time or part time.
Irregular hours workers and part-year workers
For employees with variable hours or pay, if applicable, the average earnings over the previous 52 weeks should be used to calculate holiday pay. This means that if an employee has fluctuating hours or earnings, their holiday pay reflects a fair average.
If an employee has not yet been employed for 52 weeks, the employer should look at the average pay they got during those weeks of employment to calculate their holiday pay.
(i) Rolled-up holiday pay for irregular hours and part-year workers
There is the option for employers to pay ‘rolled-up’ holiday pay for irregular hours and part-year workers.
‘Rolled-up’ holiday pay is when an employer spreads holiday pay over the year by adding an amount on top of an individual’s normal pay, instead of paying someone for their holiday when they take it.
Employers using rolled-up holiday pay must:
- Calculate it at a rate of at least 12.07% of the worker’s total pay in a ‘pay period’;
- Pay it at the same time they pay for the work the worker has done in that pay period; and
- Show it as a separate payment on the worker’s payslip.
(ii) Leave years starting on or after 1 April 2024
For leave years that started on or after 1 April 2024, employers can choose to use rolled-up holiday pay for irregular hours and part-year workers.
Overtime pay, commission, bonuses and other allowances
Holiday pay should reflect “normal remuneration” and therefore include overtime payments, commission, bonuses and other allowances, if an employee has regularly received payment for this during the previous year. If an employee regularly receives payment for any of these, this should be factored into their holiday pay calculations.
Key Considerations for employers
Understanding the complexities of holiday pay entitlements and the practice surrounding payments for employees and workers is vital to ensure compliance with the legal provisions. There have been high-profile cases in recent years with employers incorrectly calculating holiday pay, especially with the changing position around overtime pay.
With dealing with holiday pay and overtime pay, employers should consider:
- Clear Policies: Employers should have clear policies regarding both holiday and overtime pay, communicated effectively to all employees.
- Record Keeping: Maintaining accurate records of hours worked, holiday taken, and payments made is essential for compliance and to avoid disputes.
- Regular Reviews: Regularly reviewing employment contracts and policies can help ensure compliance with current laws and practices.
Legislation in this area is always changing and new rulings being bought forward. If you have any questions around this topic, please don’t hesitate to contact us and we can assist with compliance with the applicable regulations ensuring that employees are paid their legal entitlement.
If you would like advice to support with any aspect surrounding the legal position for paying employees holiday pay and overtime pay, please get in touch with Emily Morrison by calling 01727798106, or emailing emily.morrison@salaw.com.
