30th Nov '23
All employees are entitled to annual leave. But how much? This blog explains everything you need to know about calculating annual leave pro rata for your employees.
The importance of accurately calculating holiday pay is a payroll responsibility and one that impacts both a business and its employees. All staff expect statutory holiday pay as it is a standard entitlement in the UK.
At its most basic level, holiday pay is the allowance a worker earns throughout a year within a company. Typically holiday pay is an earned benefit, and it calculates depending on the number of hours an employee works over a period.
As alluded to in the classification of this employee type, ‘variable hours’ workers are not subject to fixed, regular hours within a week, but their time is varied. What exactly does this mean?
For certain employees, you can describe working hours as irregular. Here, variable hours employees are dissimilar to those working shift patterns. Whereas shift workers are subject to predictable working routines, this type of employee isn’t, meaning they are unlikely to follow the conventional working week and might work weekends or longer shifts instead.
Employers usually pay variable-hours employees an hourly rate. You can break variable hours down as follows:
Annual leave, or holiday entitlements, are mandatory across the UK. This benefit is available to all classifications of workers, regardless of their hours of work. For a UK business, it’s imperative to understand and be fully aware of the employment regulations that affect a workforce.
Did you know..? As a business, it’s your responsibility to keep abreast of any updates to regulations and comply with any labour codes that affect your payroll.
Known informally as the ‘WTR’, this piece of legislation – the Working Time Regulations, 1998 – sets out expectations for holiday entitlements. Under this rule, all classifications of workers qualify for 5.6 weeks of paid annual leave; (broadly recognised as the statutory minimum holiday entitlement) 28-day holiday allowance per year for full-time employees, inclusive of public holidays.
Applying to all workers, regardless of how long an organisation has employed them, this legal entitlement is capped at 28 days annually.
Under this rule, holidays don’t necessarily accrue. If, for example, one employee works an extended working week, exceeding the conventional five days, they are still only entitled to 28 days of holiday annually.
The minimum leave for part-time workers is pro-rata, which is where it helps to understand the classification of your workers, whether they’re part or full time, or they work variable hours.
On April 6th, 2020, the UK government announced a “reference period” increase, changing from 12 to 52 weeks to represent a revision made to more fairly capture working conditions for variable hours workers.
Even though the statutory minimum entitlement outlines the expected basic holiday allowance, employers can still be more generous with this benefit. The statutory minimum law doesn’t prevent employers from offering more days off. When a company provides this additional benefit, it’s known as contractual holiday entitlement, as they are offering this, rather than it coming from the UK Government.
For contractual holiday entitlement to be valid, it’s typically recorded within a contract and agreed upon between the employer and employees.
For employers, you must distinguish between statutory and contractual holiday entitlements. Where one is optional and negotiated at the employer’s discretion, the other outlines a governed and mandated minimum holiday entitlement. There can be nuances in your holiday benefit that differ from the WTR conventions, but this often causes complications and confusion.
|Statutory Holiday Entitlement||Contractual Holiday Entitlement|
|Set holiday entitlement to meet the national minimum holiday allowance.||Employer and employee agree to optional holiday extensions.|
|Regulated by the UK government, employers must comply with this benefit.||Negotiated into a contract and can exist outside of the statutory minimum holiday allowance.|
|Applies to all types of workers and sets the minimum expectation for holiday leave.||“Extra time” does not have to follow the same rules as statutory holiday laws.|
|Employers do not set the minimum holiday allowance.||Employers can, however, exceed the minimum holiday entitlement and extend the benefit.|
|There is a rule regarding no carry-over of the benefit between every new year (which means it’s likely to reset).||Employers can choose to allow holidays to accrue and carry over.|
How does this apply if you’re an employer and want to figure out the most effective way to deliver holiday entitlement to your workers?
For example, an employer may allow holidays to carry over between sequential years of work, whilst holiday benefits are reset yearly under the WTR regulations, and there is no carry-over rule. Except for those who cannot take their holiday due to sickness or other leave scenarios (such as parental leave), this is a basic interpretation of WTR and will likely apply to many employees. Similarly, you can substitute payment in place of unspent holiday time. However, you can alter these rules if the employer agrees mutually with the employee to allow the holiday benefits to exceed the statutory minimum.
Unfortunately, the overlap between sickness and annual leave can lead to easy mistakes. Errors, inaccuracies and general confusion often lead to costly penalties. If you’re aware of the rules, ensuring compliance with statutory minimum leave allowances doesn’t have to be complicated.
Employment law stipulates that unless employees work a regular week equivalent to full-time, they are part-time; crucial when calculating holiday pay as worker classification has different regulations and expectations.
If two employees complete similar weekly hours, those on variable hours should be pro-rated to the full-time entitlement. It’s best practice to treat variable employees fairly, meaning irregular hours are not an excuse for negotiating down benefits, limiting a worker to only the statutory minimum.
The statutory entitlement for holidays captures in weeks and days rather than hours. This common misconception can lead to inaccuracies when calculating holiday pay-outs. Therefore, this means you should be using the following computation:
Holiday entitlement = 5.6 weeks (or 28 days)
Employers will notice the differences between holiday pay and leave when dealing with variable hours employees. The relevance of this difference is key to understanding how you should be calculating holiday pay for employees on different hours or contracts.
Calculating pay-outs for full-time employees and those working on fixed hours (including any part-time staff) is often more convenient for an employer to resolve than for those on varied or irregular hours.
Fixed hour employee salaries are typically easier to calculate because employers will know in advance how many hours are completed within a day, week, and month. Unlike fixed hours, where staff complete irregular shift patterns or schedules, employers may not know the number of hours that employees will work.
The holiday rate any employees working variable hours will accrue holiday at is 12.07% against the hours they work. When calculating holiday entitlement, use the following computation:
5.6 weeks / 46.4 week
Employers with staff contracted with additional holiday entitlement will need to revise this computation, bearing in mind any differences in their holiday policy.
After a year of service, employees who work variable hours can request holiday leave anytime. You can permit leave even if the employee has not yet accrued or ‘earnt’ the holiday entitlement.
Employers are limited in how they can respond to an employee’s holiday request. An employer can refuse a holiday request, for example, under operational grounds, such as if a business is understaffed or where an employee has taken all their holiday allowance already. Whilst holiday refusals are common in some scenarios, as an employer, you are limited in how you reject holiday when it has not yet accrued.
For example: after completing a year of service, even if the holiday has not yet accrued within the new year, a variable-hours employee can request to take half a week’s holiday.
You can categorise holiday accrual in two ways:
Therefore, the rate new employees still working their first year of service will accrue holidays is 1/12th against their annual statutory entitlement. Every month, they will be allowed to request a holiday in lieu of this accrual process.
Importantly, employees are only eligible once they have worked a month; those who onboard mid-month should expect to wait until the next new month before using their holiday.
In cases where an employee on variable hours works overtime, do they accrue holiday beyond the statutory minimum? Unless a holiday accrual cap is in place, which limits annual holiday accrual, then employees could gain more holiday than the minimum allowance.
If an employer wants to cap this process, they can impose a maximum which restricts how much holiday an employee can earn, which can happen daily, weekly, monthly, or even quarterly. It’s advisable to nominate an extended period to make this process fairer for employees.
When paying different employee types, complications and challenges arise when hours and entitlements vary. Therefore you could have difficulties with calculations in your payroll system for those working variable hours and where holiday leave is slightly different.
When you rely on cloud payroll, you can simplify your payroll processes. When you synchronise payroll with other apps, you benefit from several more accurate payroll, accounting, and HR services.
Try our HMRC-recognised payroll software today.Duane Jackson, March 24th, 2022