The Complexities of Holiday Pay
It is that time of year again but holidays can be a stressful time and can also cause issues within payroll. Workers in the UK are entitled to 5.6 weeks paid annual leave per year. Part time workers will also still have 5.6 weeks of holiday but this will equate to fewer hours or days.
A worker on a salary with no other regular payments is simplest within payroll as nothing needs to happen at all. Their holiday can be recorded elsewhere and they can paid their usual salary. There is no need for a separate payment line in the payroll, keeping the payslip very simple.
What if the worker does not have fixed pay and hours?
This is where things get a little more tricky. If a worker has variable pay each period then the holiday entitlement does not change but their holiday pay does. The regulations changed in April 2020; the average pay used for the worker is an average of the weekly pay over the past 52 weeks.
If the worker started more recently then the number of weeks used in the calculation is from their start date. Weeks without pay should be disregarded and up to 104 weeks can be considered to try and find 52 weeks paid.
You could pay holiday pay at the average rate but what many organisations do is pay holiday at the usual hourly or daily rate and add an enhancement to cover any additional top up. The payments used in the calculation include payments for work such as overtime, commission and bonuses.
The calculations should be made on a weekly pay frequency, other pay frequencies, such as monthly, do not work as well and the calculation needs to be either outside of the payroll or will be a compromise. Many organisations do calculate average pay on monthly, 2-weekly or 4-weekly payrolls however.
What about zero hours workers?
This is even harder to manage than irregular hours and has become more complex follow Harper Trust vs Brazel. Previously 12.07% was used for many irregular workers but this should now be avoided for most. The 12.07% method was a way of adding an amount based on the hours worked but is considered rolled up holiday pay and therefore should not be used.
Zero hours workers are entitled to 5.6 weeks paid holiday per year the same as all other workers and they will be entitled to holiday from when they start work to when they leave. This means a worker will continue to accrue holiday even if they are inactive and not working. Good database hygiene is essential therefore and inactive workers issued P45s promptly.
This is all still new so the guidance may well change over time. Our current understanding is that the zero hours employee will have 5.6 weeks of paid holiday per year and the holiday will be paid at an average of their weekly rate. The same criteria are used for average holiday pay as for the irregular worker and weeks without pay disregarded.
If you wish payroll to calculate holiday entitlement and pay for zero hours workers then only a weekly pay frequency works, other pay frequencies are a compromise as they will not take into account weeks without pay.
Other complications of holiday pay
Not all holiday is equal. All workers in the UK are entitled to 5.6 weeks of annual leave but 4 weeks of this falls under an EU directive and the remaining 1.6 weeks is UK law. For a five day worker this is 20 days of EU leave and 8 days of UK leave.
The four weeks of EU leave needs to be paid at the average rate of pay, the remaining 1.6 weeks could be at another rate. Most employers will just pay all holiday at the same rate.
The minimum leave to take in the year is 4 weeks, the 1.6 weeks could also be carried across to the following year depending on the employment contract.
Holiday is complicated, spare a thought for your HR and payroll teams.
If you are looking to outsource your payroll, we can take the hassle out of your payroll. Get in touch today and find out how we could support your business.
Other Useful Resources for Holiday Pay:
How to deal with holiday anxiety
Calculating holiday pay for workers without fixed hours or pay