Are you calculating holiday pay correctly?
Holiday pay is a legal right for workers in the UK, yet it is one of the most significant sources of error for employers when it comes time to do the payroll.
This is largely due to the fact that some contracts make it difficult to work out a worker’s entitlement and pay, particularly if they are on part-time or irregular hours contracts.
Holiday pay calculations can vary depending on the nature of the employment contract and the employee’s working hours.
Your obligations
All continuously employed workers are legally entitled to 5.6 weeks of paid statutory holiday per year.
Four weeks of this holiday must be paid at a worker’s normal rate of pay, which may include regular overtime and commission.
While this is typically easy to calculate for full-time workers on the same weekly hours, those with different contracts may present a challenge to employers.
Additionally, new regulations have come into force that govern the way that holiday pay is calculated.
From 1 January 2024, changes to the Working Time Regulations have been introduced to simplify the way that holiday entitlement and pay are calculated by employers.
Changes for irregular workers
A significant clarification brought about by new regulations is the definition of an ‘irregular hours worker’ and should therefore be subject to the relevant holiday entitlement.
These workers have been defined as workers who “in relation to a leave year, if the number of paid hours that they will work in each pay period during the term of their contract in that year is, under the terms of their contract, wholly or mostly variable”.
Under new regulations, irregular hours workers will accrue holiday in a slightly different way to previous guidelines.
For holiday years beginning on or after 1 April 2024, these workers will be calculated as 12.07 per cent of actual hours worked in a pay period.
For example, if an employee’s holiday year begins on 1 April 2024 and they work 120 hours in April, their holiday entitlement will be calculated as:
120 x 0.1207 = 14.484 hours
Round up or down to the nearest hour = 14 hours
You’ll need to make sure this is calculated correctly before putting holiday hours through payroll to ensure irregular hours workers receive the right amount of pay.
Rolled-up holiday
To avoid the potential for underpaying staff on irregular hours, some employers may choose to use the ‘rolled-up holiday pay’ method.
This allows employers to include an additional payment with every payslip to cover a worker’s holiday pay throughout the year, as opposed to as and when they take annual leave.
It should be calculated based on a worker’s total pay in each pay period and paid at the same time as normal pay for hours worked.
It must be paid in addition to a worker’s normal wage and cannot be paid such that an employee effectively receives less than the National Living Wage or National Minimum Wage, whichever is applicable.
What if it goes wrong?
Mistakes happen, particularly if you employee staff on a number of different contract types.
However, mistakes can also be costly and damaging to your reputation as an employer and to your relationship with your staff.
If a mistake occurs, taking swift action and remaining transparent is the best way to correct the error and avoid unnecessary damage. You should ACT:
- Acknowledge the mistake: Inform the affected employee(s) as soon as you identify the error and assure them you will amend it.
- Correct the error promptly: Calculate the correct holiday pay and make any adjustments to the employee’s pay as soon as possible.
- Train and review – Identify any weaknesses in how you calculate holiday pay and provide training to the relevant people on the latest regulatory changes.
If payroll presents a challenge to your business and you are concerned about complying with new regulations, we can advise you on accurately calculating holiday pay and other considerations for payroll.
For tailored payroll advice, contact us today.