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Calculating holiday pay

Calculating holiday pay

Jen Arber

Holiday pay rate calculations
Employers should already be aware that there has been a change to the rate of pay that some employees should receive when on annual leave.

We recommend that for bespoke guidance, you contact your HR specialist. Most payroll software should now have a report to enable this calculation to be done.
What has changed?
The courts have ruled that the calculation of an employee’s holiday pay must be based on their “normal pay”.

The key change to note is that now, employers are obliged to use a 52 week reference period to calculate an employee’s holiday pay rather than the previous ruling of 12 weeks.

N.B. this applies to the 4 weeks of annual leave provided by the original Working Time Regulations and it is at the employer’s discretion whether it is applied to the additional 1.6 weeks provided by the UK Working Time Regulations.
What is included in “normal pay?”
  • Overtime
Compulsory but non-guaranteed overtime and overtime that cannot be unreasonably refused must be included. Voluntary overtime that is worked regularly so that it becomes a custom and practice or where it is not truly voluntary must also be included.
  • Commission
Some types of commission must be included in the calculation of holiday pay, for instance commission paid on the basis of each sale made or commission paid on reaching individual or team sales targets. The employee would be disadvantaged by taking annual leave.
  • Irregular, annual or one-off payments
These types of payments would include things like discretionary or annual bonuses and commission paid irregularly or on an annual basis. It is not recommended that these irregular payments are factored into employers’ holiday pay calculations at this point.
  • Some types of travel allowance
If the employer makes regular payments to the employee to compensate the employee for time spent travelling from site to site (not the cost of the travel e.g. mileage/train ticket) it needs to be included as this would be normal pay. However, it is not suggested that employers need to include payments for time spent travelling on an occasional or one-off basis.
Does this apply to me?
Every employer’s pay situation is unique, and we recommend that if you think this applies to your business, that you seek specialist HR advice.

If you pay for Markel Tax Investigation Service, their employment law helpline can assist, 0845 250 0763.

Learn more about calculating holiday pay.