Navigating the complexities of holiday pay calculation can be a challenge for small businesses but ensuring accuracy during the process is crucial.

Holiday pay not only affects your financial management but also upholds the rights of your employees and keeps you in compliance with the law.

This article aims to demystify the calculations surrounding holiday pay, enabling you to manage this aspect of your payroll efficiently.

The basics of holiday entitlement

In the UK, all employees are entitled to 5.6 weeks (28 days) of paid holiday per year, which includes bank holidays.

This entitlement is based on a full-time working schedule, and part-time employees receive a pro-rata equivalent.

The breakdown of this entitlement comes from 20 days under European law and eight days under UK law.

Calculation of a week’s pay

The foundation of calculating holiday pay is understanding what constitutes a week’s pay.

This is defined as the amount an employee would earn for a week of work under their current employment contract.

The calculation can become complex due to various types of pay that might need inclusion, as determined by UK and European legal precedents.

Inclusion of overtime and additional Payments

When calculating holiday pay, you must consider not just the basic salary but also regular additional earnings such as:

• Guaranteed overtime: Overtime that the employee is contractually assured to receive.
• Non-guaranteed overtime: Regular overtime that the employee is expected to work, though it’s not guaranteed in the contract.
• Voluntary overtime: Overtime that is neither guaranteed nor expected but is often worked.
• Bonus payments: This includes any additional earnings like attendance or productivity bonuses.
• Commission payments: Earnings from sales or services that the employee would have otherwise made during their holiday period.

Step-by-step calculation

Here is the basic formula for calculating holiday pay for one of your employees.

• Determine the standard weekly pay: Calculate the average weekly pay based on the employee’s regular working hours and basic salary.
• Factor in additional earnings: Add the average regular additional earnings (overtime, bonuses, commission) to the weekly pay. This average is usually based on a reference period preceding the holiday – typically 52 weeks.
• Calculate pro-rata pay for part-time employees: For part-time employees, adjust the calculation to reflect their working hours.
• Consider variations: Be mindful of any variations in pay or working hours in the reference period, as these will affect the calculation.

Calculating holiday pay accurately is vital for small businesses to ensure compliance with employment laws and to maintain employee satisfaction.

By understanding the components that constitute holiday pay and following a systematic approach to its calculation, you can manage this aspect of your payroll effectively, fostering a positive and legally compliant workplace environment.

Speak to one of our experts to find out how we could help you with your payroll responsibilities.