Holiday Pay: The Complete Guide for Employers

Holiday pay: Perhaps few things in life are as wonderful as these two words put together.

It’s an entitlement not every country provides, and one we are somewhat fortunate to have here in the UK. The 9 to 5 grind is real, so the fact that employees get paid to take time off means they can enjoy a few well-deserved breaks throughout the year - whether that’s to rest and recharge or pursue other personal projects or passions.  

But what is holiday pay and entitlement, and how is it calculated? In our latest guide, we unpack everything to do with holiday pay, how it’s calculated at a basic level, as well as a few other things you need to consider when putting together your first holiday pay policy.

What is holiday pay?

Holiday pay is the amount of money you pay an employee for taking any leave they’re entitled to (more on this in a bit). In other words, employees should receive holiday pay for their statutory entitlement as well as any additional contractual holiday they’re entitled to. 

The most typical example is a full-time employee working a set amount of hours every week. As UK legislation states, these workers are entitled to 5.6 weeks of holiday. And the pay they get for each of these holiday weeks is essentially the same as their normal weekly pay.

How does holiday pay work?

Based on this example, many assume that holiday pay should be calculated using the employee’s base salary. But that’s not quite the case.

In reality, there are a couple of things to bear in mind - factors, if you will, that can affect the final calculation of pay; these include:

• the type of employment contract a worker is on - whether that’s a fixed contract or they work irregular hours;

• whether or not an employee receives things like regular overtime, bonuses, or commission payments;

• what the employer considers, or what the employee can prove to be ‘regular’.

All of these factors mean that working out holiday pay isn’t quite as straightforward in some scenarios as we’d like it to be. Still, let’s look at how you can calculate holiday pay at a basic level.  

How to calculate holiday pay

Calculating holiday pay for an employee starts out pretty simply - it’s their average weekly pay. Our post on how to calculate holiday pay provides a full breakdown of the calculation as well as guidance on how to address different scenarios - from workers working irregular hours to zero-hour contract holiday pay.

Essentially, an employee shouldn’t be paid less while on holiday than when they’re working regularly. But as mentioned before, that gets complicated a little by the type of contract an employee is on.

Holiday pay policy: Further considerations

We’ve talked a little about holiday pay and how to go about calculating this. Now, let’s look at a few other considerations you should keep in mind when putting together a basic holiday pay policy based on holiday entitlement.

Let’s start by breaking down what holiday entitlement actually is and some standard guidance the government provides when it comes to managing workers’ paid time off. 

What Is Holiday Entitlement?

Here’s a quick breakdown of the concept:

Holiday entitlement - also known as annual leave entitlement - is the paid holiday workers are entitled to in their country, at a minimum. 

Now, this entitlement will look different from country to country, but the basic premise is the same - if you’re an employee and are contracted to work a certain amount of hours for a company, you have a right to take some time off.  

How much holiday are workers entitled to in the UK?

In the UK, the number of days an employee is entitled to is generally 5.6 times the number of days they work in a week. So, a full-time worker who works five days a week would be entitled to 28 days (or five days x 5.6). 

It’s important to note that 28 days is the maximum statutory entitlement an employee is entitled to. For instance, if you have employees working 6 or 7 days a week, their entitlement would be capped at 28 days (in other words, you don’t need to do the calculation). That being said, companies can choose to offer their employees more leave, if they desire, and could even provide unlimited paid time off (PTO) as a benefit (but this has some pros and cons). 

This is the most typical example of a UK employee's entitlement. Holiday entitlement for part-time workers works a little differently. If an employee only works three days a week, for instance, their entitlement would be 16.8 days, or three days x 5.6 holiday weeks. 

By now, you may have noticed that some holiday entitlement calculations result in decimals or part days. In this case, you’ll either want to convert the employee’s leave to hours or round up to the nearest half days - so for 16.8 days, that would be 17 days. 

What about bank holidays? Can I include these as part of the entitlement?

Good question! The short answer is it’s up to you as an employer. 

Some businesses have workers take these days off as part of their annual leave entitlement. Others might pay for them in addition to their annual leave entitlement. The choice is up to your company.*

When an employee decides to leave your company, their full statutory entitlement will need to be pro-rated. That includes both statutory leave days and bank holidays. That being said, you can still split entitlement between statutory and bank holiday days. 

How Much Notice Do Employees Have To Give To Take Leave?

Again, we can look to the UK Gov website for guidance here. According to them, employees should give their employer twice as much notice as the amount of time they intend to take off. So, if one of your employees wants to take one day off for holiday, they should give you at least two days' notice right before this. 

But this guidance is pretty standard and could vary depending on what their work contract states (which overrides what the government says).

How Does Overtime Affect Holiday Allowance?

Remember when we said holiday pay could get a little complicated? This is where it can - when it comes to factoring in overtime.

In fact, a number of court cases have been fought over this (it seems we take our holiday entitlement very seriously here in the UK)! But if there’s one thing we can take from all of these cases, it’s this ruling: that holiday pay should reflect non-guaranteed overtime.

That is to say, if employees are required to work overtime by their employers (otherwise known as non-guaranteed overtime), then this overtime must be included in their pay when determining holiday pay. This is why it’s so important to keep in mind that holiday pay is based on more ‘than just basic pay’.

Of course, guaranteed overtime also needs to be included in this as well (after all, it’s guaranteed).  

You can learn more about this in our more in-depth post about calculating holiday pay.

Setting up a holiday pay policy

A holiday pay policy pretty much does what it says on the tin - it’s a way for your organisation to manage how and when your employees take their holiday. Having a clear policy in place will not only clear up any confusion but it’s also a great way of reducing employee queries about their holidays. In addition, it can help lower the risk of holiday entitlement misuse.

To begin with, you’ll want to clarify a few things, like whether your organisation observes bank holidays (we discussed this earlier). You’ll also want to explain how much notice employees should give before planning and booking their holiday - again, as discussed before, you can vary this from standard government guidance as long as you make this clear in your employment contracts. You might even want to set up a holiday purchase scheme. 

You might also want to outline when employees can or can’t take holidays. For instance, you can require employees to take time off during bank holidays like Christmas or New Year if you choose to close your business on these days. 

In a similar way, you can restrict staff from taking days off during busy periods. Still, you don’t want to get in the way of workers taking their leave full stop - remember, workers have a right to holiday here in the UK. In fact, as an employer, you should do everything to encourage employees to take their annual leave. If you don’t, you’ll look bad in the eyes of UK law. If you ask employees not to take leave on specific days, you must give them a chance to take that leave at another time. 

Make holiday pay a breeze with PayFit

Don’t let holiday pay wipe you out…PayFit automates some of the most complex areas of payroll, including holiday pay, so you can finally put your feet up!

Most payroll software and bureaus fall down when it comes to processing holiday pay. They either refuse to touch it (and we get it; it’s complex!) or don’t have the proper functionality to automate this.

But PayFit automatically looks back up to 104 weeks to retrieve 52 weeks of pay you can use, then calculates the average daily rate for you. It’s all automatic, which means no tricky spreadsheets or manual calculations. Simply switch on the toggle - either at company level or employee level - and the rest is done for you.

Plus, whenever an employee logs annual leave, their payslip gets updated, including the rate used to calculate their holiday pay. So if they take multiple holidays in the same month, they’ll see each different rate that’s been used on their payslip. In addition to this, they can view a breakdown of their holiday pay calculations on their PayFit employee portal. Now that’s smart payroll.