When did the law on holiday payments change ?

The law on holiday pay changed as of 6 April 2020.

However many employers are not aware of the impact of these changes and continue to pay their employees incorrectly.

Why did the law change on holiday pay in April 2020 ?

The law changed to ensure that workers and employees do not suffer a financial loss due to taking holiday. The principle is that the pay received by a worker /employee while they are on holiday should reflect what they would normally have earned if they had been working.

Make managing your employees easier with online HR software Click Here

Can I just pay my employee their basic wage when they are on holiday ?

The majority of the UK’s workforce are full-time workers on fixed hours and fixed pay. These workers typically are on a fixed monthly salary. If they take a week’s holiday, they will receive the same pay at the end of the month as they normally receive should they be working which is fine.

The problem arises when employees pay varies, for example when employees do variable hours, overtime or are paid commission. In these circumstances you cannot just pay basic salary when they are on holiday as they would be disadvantaged

Why do I have to take overtime or commission into consideration when working out holiday pay ?

Each week or month an employee is paid a set amount of money based on their basic salary and any additional paid hours they have worked or commission they have earned.

To then only pay the employee a basic salary less than their average normal weekly / monthly earning when not in work, means the employee has been financially disadvantaged due to taking holiday.

Overtime & holiday pay

An employee earns a basic wage of £15.00 per hour or £31,200 per year, but then works an average of 5 hours paid overtime a week throughout the year, this increases their average annual salary to £ 35000.

This equates to £673 per week.

If the employee is only paid their basic wage weekly wage of £600 per week they are £73.00 worse off for taking a week’s holiday.

If overtime is paid at an increased rate, this also needs to be factored into the employee’s average annual earnings.

Commission & holiday pay

An employee is paid a basic wage of £10 per hour or £20,000 per year, and then earns £10,000 commission resulting in total annual earnings of £30,000 per year.  

This equates to a weekly wage of £576 per week.

If the employee is only paid their basic wage weekly wage of £384 they are £192 worse off for taking a week’s holiday.

What if I pay commission in arrears?

Even if you pay commission in arrears this still applies as the employee is still finically disadvantaged due to taking holiday all be it the impact on their earning may not show itself until a few months later as they were not earning commission whilst they were on holiday.

How do I calculate holiday pay for my employees?

Employees whilst on holiday should be paid the equivalent of an average weeks / days wage

This is calculated based on their average earning over 52 week worked pay data period.

When an employee has worked less than 52 weeks, the pay data reference period should be as long as possible.

The pay reference period ignores any time an employee has had off work sick or on holiday i.e. the average weeks wage needs to be based on 52 weeks of paid work.

1. Write down / record how many hours per week the employee worked each week for the preceding  52 weeks’ pay data ( note: the pay data period exclude weeks of statutory leave, sickness holidays).
2. Add the total number of hours.
3. Divide the total by 52.
4. This will provide your average number of hours worked per week.
5. Multiple your average number of hours per week by your hourly pay.
6. This will provide your average weekly pay.

*For commission based employees the 52 week pay data period will be based on weekly or monthly earning not the number of hours worked.

* When an employee is paid overtime at an increased rate (1.5 or double time etc) the pay calculation is based on the above basic salary, plus the same calculation solely on overtime hours worked, times the overtime rate then  added to the basic salary calculation.

Make managing your employees easier with online HR software Click Here

Holiday pay calculation example.

Robin is contracted for 40 hours per week and always got paid at £11 per hour.

This equates to £22,880 per year or £440 per week.

His timesheets show how many hours he actually worked in each of the preceding 52 weeks’ pay data (note: qualifying weeks exclude statutory leave, sickness holidays) each week.

Robin’s holiday pay reference period would start the previous week to the actual holiday dates

Week 1 and count back 52 weeks.