Calculating holiday pay for workers

After a number of law changes and court cases, holiday pay has become a little confusing for businesses lately.

The good news is that calculating holiday pay for workers with fixed hours and pay remains straightforward because a week’s holiday pay will be the same as their pay in any normal week.

It starts to get trickier when it comes to workers with irregular hours or variable pay.

Following a change to the law in 2020, employers are now required to base holiday pay based on a worker’s “normal remuneration” – the average pay received over a 52-week reference period. This needs to take account of any regular bonuses, commission, unpaid leave and overtime the worker receives and is calculated each time holiday is taken by the worker, meaning that the average can vary over the year.

Following a recent Supreme Court ruling in July 2022, the law has also changed how this should be calculated for part-year and seasonal workers who are employed all-year round.

Previously, many employers calculated leave entitlement for part-year workers based on 12.07% of their hours worked. Instead, these workers are entitled to the same holiday as their full-time counterparts, without a pro-rata reduction. This entitlement should be calculated by taking using the 52-week average as above.

Underpayment in holiday pay can lead to claims of unlawful deduction from wages with workers able to claim for up to two years of historic underpayments. 

To avoid the potential costly implications of getting holiday pay wrong, it is important for employers to regularly review and audit holiday pay to ensure calculations are in-line with the current law.

We can provide you with a fixed price audit for your business to ensure your calculation methods are correct and to quantify any potential liability for any incorrect payments.

For a no obligation quote, please contact Tom Martin. Alternatively, please click here to view our employment law page.