As an employer, you must pay employees their correct holiday pay entitlement. Employees are entitled to a week’s pay for each week of statutory leave that they take and most individuals who work overtime are entitled to 5.6 weeks’ paid holiday per year.

The calculations are based on the employee’s working patterns, the number of hours they work and how they are paid for the amount of overtime they work. This varies for full-time, part-time and casual employees.

It’s also important to take account of new legislation introduced in 2022. This covers the basis for incorporating overtime for part-time and shift workers, additional bank holidays, increases to the national minimum wage and the national living wage, and the maximum number of working hours that your employers can legally work.

This article sets out the basis for calculating holiday pay under various scenarios and describes the 2022 changes in more detail. Any topics affected by the new rules are highlighted by CHANGE in the sub-heading.

The basis of holiday pay entitlement

Rate of pay

All employees, regardless of their employment status, are entitled to paid annual leave. The rate of holiday pay must be the same as their rate of pay when they are working.

Full-time employees

Holiday pay entitlement is made up of a minimum of 4 weeks’ annual leave, under the Working Time Regulations, plus a minimum of 1.6 weeks based on the amount of overtime worked.

That additional 1.6 weeks may include bank holidays, depending on the employee’s contract.

For full-time employees, this equates to a minimum of 28 days’ annual leave.

CHANGE: Part-time employees

Part-time employees are also entitled to annual paid leave based on a minimum of 5.6 weeks. However, the final figure is in proportion to the hours they work. To calculate entitlement, multiply the number of days per week worked by 5.6.

For example, an employee working 3 days a week would be entitled to a minimum of 16.8 days’ paid holiday.

Depending on the number of hours’ overtime, the final entitlement may increase. The basis for calculating entitlement changed in April 2022.

• Under the previous rules, overtime entitlement was based on the previous 12 weeks worked.

• The overtime calculation must now be based on the previous 52 weeks worked.

If you offer your full-time employees a higher minimum entitlement, you must offer part-time employees the same basis for calculation.

CHANGE: Casual employees

Shift workers and employees with zero-hours contracts are also entitled to annual paid leave based on a minimum of 5.6 weeks – again based on the number of hours worked. This ruling applies when the employment contracts for these employees are in place for a whole year.

Like part-time employees, the basis for entitlement has changed from the previous 12 weeks to the previous 52 weeks, following the April 2022 change in legislation.

Read More: A guide to permanent employment contracts

CHANGE: Employees on short-term contracts

Employees on shorter contracts lasting less than a year or employees who leave or join during the holiday year are entitled to a proportion of the full year’s minimum entitlement.

For example, entitlement for an employee with a 6-month contract would be based on a minimum of 2.8 weeks paid leave.

This applies to full-time, part-time and casual employees. The final calculations are based on the guidelines in the previous sections and must take account of the April 2022 changes.

New employees

Employees in their first year with your business may be able to take paid leave with your agreement, even if they have not accrued enough time for normal entitlement.

There is no statutory basis for this calculation. Instead, you should agree to a fair amount which could be based on the employee’s time in the job, rate of pay and the entitlement you offer to employees with similar responsibilities.

Contractors and self-employed workers

If you hire self-employed people for projects, they do not normally have any paid holiday entitlement.

However, if you hire contractors, you may have to pay holiday entitlement, depending on the employment status agreed in their contract.

Maternity and paternity leave

Any employees taking leave for maternity, paternity, adoption or shared parental responsibilities are entitled to accrue annual holiday entitlement while on leave. That type of leave is additional to any other paid leave entitlement.

Related: Gender Pay Gap: Advice for employers

CHANGE: National minimum/living wage

If you have employees who are paid the national minimum wage or the national living wage, you should take account of the new rates that came into effect in April 2022:

• The national living wage increased from £8.91 per hour to £9.50 per hour.

• The new national minimum wage is £9.18 per hour.

• For 18-20-year-olds, the minimum wage will be £6.83 per hour.

• For 16-17-year-olds, the minimum wage will be a minimum of £4.81 per hour.

Tax and NIC thresholds for 2021/22.

CHANGE: Bank holidays

You can choose whether to include regular bank holidays in the 1.6 weeks’ holiday pay. For 2022, you must take account of the 2 additional bank holidays for the Queen’s Platinum Jubilee and the Queen’s state funeral.

In 2023, there may be an additional bank holiday for the coronation of King Charles in May. This is yet to be confirmed as the event takes place on a Saturday.

Related: The importance of an Employee Handbook and Contract of Employment

Other factors affecting calculations

Apart from factoring in overtime, which will be covered in more detail in the following section, your calculations may have to take account of other payments you make, including:

• Commissions

• Performance bonuses

• Travel allowances and expenses.

However, those three factors are discretionary and you can choose not to include them.

Calculating holiday pay entitlement based on overtime

Types of overtime

If employees work overtime, this should be factored into the minimum 1.6 weeks paid leave entitlement. This applies to all types of overtime, including:

• Voluntary overtime – You don’t have to offer overtime and employees don’t have to accept any overtime you might offer.

• Compulsory overtime – You require employees to work additional hours and employees have to work the specified hours. The details should be incorporated in the employee’s contract of employment.

• Non-guaranteed overtime – You do not offer guaranteed overtime, but if you require employees to work overtime, they must accept it and complete the work.

You can also pay overtime payment to employees who attend out-of-hours training courses or who travel to different locations for work or business meetings.

Related: How To Handle Employee Off With Work Related Stress

CHANGE: Maximum overtime

Regardless of the type of overtime, you cannot force employees to work an average of more than 48 hours in a working week. This is effective from April 2022.

CHANGE: Calculating average pay

When you calculate holiday pay for employees who work overtime, you calculate the entitlement and the rate of pay based on averages from the previous 52 weeks, up from the previous 12 weeks following the April 2022 changes.

It is essential to calculate an accurate weekly average because the amount of overtime and the employee’s rate of pay may vary over the 52-week period.

Some employees may have weeks when they receive no pay. In that case, you should take earlier worked weeks to calculate the average weekly pay. If necessary, you can go back a maximum of 104 weeks to find worked weeks.

If an employee was on sick leave during the 52 weeks and received Statutory Sick Pay, you should use other weeks if SSP was lower than their average weekly wage.

Take professional advice

This is a brief outline of the legislation that applies to holiday pay entitlement. If you would like to discuss any aspect of the legislation or need help to determine holiday pay entitlement, our team of experienced small business accountants and employment lawyers will be glad to help.

To find out more, please contact us at  info@accountsandlegal.co.uk or see our full range of accounting services. 

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