How To Calculate Holiday Entitlement

UK Businesses lose around £1.5 billion each year in holiday pay miscalculations, and even more in morale. Failure to calculate holiday entitlement properly can create serious problems in the workplace, with a 2023 CIPD Study titled “The Value of Pay” finding that around 43% of employees reported feeling undervalued when finding their holiday pay was […]

The post How To Calculate Holiday Entitlement appeared first on Real Business.

UK Businesses lose around £1.5 billion each year in holiday pay miscalculations, and even more in morale. Failure to calculate holiday entitlement properly can create serious problems in the workplace, with a 2023 CIPD Study titled “The Value of Pay” finding that around 43% of employees reported feeling undervalued when finding their holiday pay was incorrect, and their likelihood of leaving their job increases.

The complexity of holiday entitlement can be dispelled somewhat with the right equation. Real Business has put together this guide on calculating holiday entitlement for that purpose, looking at your legal obligations, the differences in rules for full-time and part-time employees, and all other relevant considerations.

Understanding Legal Obligations

By law, all UK Business owners are entitled to issue both holiday pay and holiday entitlement correctly under the UK’s Working Time Regulations 1988. The statutory minimum holiday entitlement is 5.6 weeks per year – roughly 28 days for all those working a normal 40-hour week.

Do Bank Or Public Holidays Count?

UK bank holidays consist of eight bank holidays per year, but whether or not you want to include them in the 5.6 weeks of holiday entitlement is up to you.

• Include Bank Holiday Entitlement – If you choose to take the statutory holiday entitlement out of the 5.6 weeks that your employees have, then your employees will have 20 days of holiday in the year.
• Exclude Bank Holidays – Full-time workers will receive 28 days of annual leave where bank holidays are excluded from the entitlement, but some employers will choose to give them an additional 8 days of annual holiday entitlement on top of as good will, resulting in 36 days of paid holiday per year.

Ensure your bank holiday entitlement policy is clearly outlined in the employment contract to avoid any potential issues with employees and stay consistent.

Holiday Pay Eligibility

All workers in the UK are entitled to annual leave, but specifically:

• Full-time employees
• Part-time employees
• Part-time workers
• Agency workers
• Workers with irregular hours
• Zero-hours contract workers
• Some self-employed individuals

Calculating Holiday Entitlement

Holiday entitlement and holiday pay are two different things. Entitlement refers to the actual number of days you have for holiday allowance.

Full-Time Employees

In the UK, working full-time typically means working 35 – 40 hours a week. Typically, this is five days a week, 8 hours a day, Monday – Friday.

Calculating how much holiday a full-time employee is entitled to is simple: 5.6 weeks. The calculation is 5.6 weeks x 5 working days/week = 28 days holiday. Failure to give this much annual leave allowance to a full-time employee is effectively breaking the law.

Part-Time Employees

Part-time employees work out how many holidays they have on a pro-rata holiday entitlement basis, meaning they earn annual leave proportional to the number of hours and number of days worked. This is to show fairness to those who put in higher hours per week than others.

The calculation is as follows: (days a week worked/5 days) x 5.6 weeks = pro-rata holiday entitlement. Example:

• (3 days / 5 days) x 5.6 weeks = 3.36 weeks (round up to the nearest half-day)
• 3.36 weeks x 3 working days/week = 10.5 days holiday

Accrual Of Holiday Entitlement

Over time, as an employee works for a company, they will build up holidays for use throughout the year.

This has three important implications:

• New Hires – A new hire has their holiday entitlement calculated on a pro-rata basis, meaning that they will not have any leave entitlement until they’ve put hours in. However, this can be changed on account of the business owner at any time.
• Holiday Year Reset – Employees who have been with you for the full year will have all their annual leave entitlement at the start of the holiday year.
• Leavers – Staff that leave will take home all holiday pay accrued and unused up to their leaving date.

Tools For Easy Holiday Entitlement Calculation

Calculating holiday entitlement, like most office-based duties, is best done using software specifically meant to streamline and simplify the process.

Many free and accurate holiday entitlement calculator software already exist, such as:

• Gov.UK Holiday Entitlement Calculator: A simple and reliable tool provided by the UK government.
• Timetastic: Offers a free holiday allowance calculator, as well as a time management system.

There are also paid options that have enhanced features, such as:

• CharlieHR: A user-friendly HR platform with an integrated holiday calculator and leave management system.
• Breathe HR: Offers a comprehensive holiday management solution, including accrual tracking and reporting.

It’s worthwhile ensuring you have a good annual leave software system backing you up, as a 2023 survey by Peninsula found that 22% of employees have found themselves making holiday pay errors, and are technically liable for claims not issued.

Calculating Holiday Pay

Holiday pay refers to the amount of money an employee receives for their holiday time, as all employers are legally liable to pay them for the day’s work.

A 2023 Croner Study named “Holiday Pay Uncertainty Among Employees” found that a staggering 60% of employees do not know, or check, how much their paid annual leave amounts to, and some have even pressed their employment about it. This is why it’s important to know ahead of time.

That being said, it’s not as straightforward as calculating annual leave entitlement, due to the different pay structures that exist amongst workers.

Weekly Pay Reference Period – The Standard

The method most often used for calculating paid holiday is based on the average weekly earnings for an employee for the past 52 weeks, referred to as the “reference period”. The Low Pay Commission found in a recent report that over 75% of UK Workers have earnings that fluctuate weekly, which is why the annual leave pay entitlement being based on 52 weeks is fairer in the long run.

The method used to calculate holidays is simple: reference period earnings divided by 52. For example: £26,500 / 52 weeks = £510 per week

Many of our readers sometimes ask what if the hire in question hasn’t worked a full 52 weeks, yet? In these cases, you need to adjust the reference period to match the number of weeks worked.

Reference Period Versus Pay Structures

If an employee is paid on a difference basis than 40 hours a week per year, then you must adjust for their specific pay structure:

• Hourly Rate – An employee who is paid hourly is calculated based on the hourly rate set during the reference period.
• Salaries – Salaried Employees receive normal salaries during holiday seasons.
• Commissions – All commissions earned by employees must be included in the holiday pay calculation to avoid misallocation and unfair treatment.
• Bonuses – Discretionary or not, bonuses should be factored into holiday pay calculations.
• Overtime – If an employee works overtime as a regular part of their work pattern, then this also must be calculated in holiday pay.

Ensuring Accurate Calculation

Using payroll and timesheet software in your accounting department is key for ensuring you comply with statutory annual leave entitlement.

• PayFit: An all-in-one HR and payroll platform that automates holiday pay calculations for different types of workers and pay structures.
• KeyPay: This software includes a 52-week averaging feature, helping ensure accurate pay for non-standard working patterns.
• Staffology: Allows holiday entitlement management and payments for salaries and hourly employees.

Managing Holiday Allowance

To effectively manage holiday leave is to maintain smooth business operations and ensure employee satisfaction. A 2023 CIPD study found that 69% of UK employers found that offering their employees some flexibility in scheduling and dealing with leave requests leads to a more positive work environment, as well as having a good effect on productivity. With efficient tracking and approval processes, managing holiday allowance is a walk in the park.

Clear Holiday Policy

Employers and employees are both bound by the policies they set and sign, meaning that writing out some clear rules on how much annual leave entitlement exists is the best way to ensure you adhere to the legal minimum days, as well as establish consistency.

The following are what you should mention within the policy:

• Holiday Entitlements – How much holiday is an employee entitled to, as well as whether or not bank holidays are included or considered additional.
• Holiday Request Procedures – One rule a lot of companies find themselves establishing almost immediately is the notice period for taking holidays, to ensure there’s capacity within the company.
• Blackout Periods – Some businesses require all hands on deck during certain times of the year and will impose restrictions on when holidays can be taken to ensure that they are not left without capacity.
• Carry-over rules – Holiday allowances can be carried over to the next year if the employer allows. Dictate whether this is the case or not.
• Payment in place of holiday – Unused holiday doesn’t necessarily have to be paid on termination of the contract, so it’s best to outline if that’s the case.

How To Handle Annual Leave Requests?

Whilst everyone has statutory holiday entitlement, whether or not they’ll be granted on the days asked is up to the company.

Business Needs

As an employer, you have duties to both your company and employees, and this means reserving the right to deny a leave request if it puts your business operations at risk

A 2023 CIPD report titled “The Cost of a Bad Hire” highlighted that unplanned absences cost UK businesses around £554 per employee a year. So the first way you can ensure that your annual holiday entitlement policy caters to your business needs is by adding a notice period before each submission. For example, nobody can book holidays for days less than a week away, unless given express permission.

To determine whether or not you can afford to take a paid holiday during a business period, consider:

• Critical Roles – Is the person leaving considered part of a critical role? Can you redistribute their labour?
• Project Deadline – Employees involved in ongoing projects whilst asking for leave can cause delays. Can the deadline be adjusted, or reprioritised? Can it be given over to other coworkers?
• Customer Service – Accounting for incoming customers is one of the biggest logistical considerations a business has to make. If their absence slows down customer service, it may be considered too much of a bottleneck.

Legal Compliance

When can and can’t an employer refuse annual leave? The Working Time Regulations 1998 are what sets the legal framework to ensure holiday entitlement, and under these regulations, employees must have 5.6 weeks of paid annual leave made available to them.

Understand that whilst this doesn’t mean you can’t deny annual leave, you are allowed to postpone/delay for the reasons stated above.

That being said, there are also other types of leave an employer must give:

• Statutory Sick Leave Pay – Employees who are out of work for extended periods due to sickness can apply for statutory sick pay, which is not deducted from their annual leave.
• Maternity, Paternity, Paternal Leave – When a parent has a child and must stay home to look after/birth them, then the law dictates that employers are bound to let them take leave. Failure to comply with these regulations in particular can lead to costly fines, but also serious reputation damage – both within and without the company.

Conclusion

Overall, calculating annual leave is a fairly straightforward affair that only becomes complicated when working patterns are irregular. Nonetheless, the best and most simple way to ensure annual leave entitlements don’t become a problem within the company is to outline and highlight a fair policy.

It’s fairly easy for employers to stay on the right side of the tracks during holiday allowance disputes, and so long as reasonable considerations have been made for an employee, there is not much consequence that will come from miscalculation or denial of annual leave. This has been an article by Real business, and we hope it has helped.

The post How To Calculate Holiday Entitlement appeared first on Real Business.