How should I be calculating holiday pay?

On 1 January 2024, new legislation came into force relating to holiday entitlement and holiday pay.  Part of this new legislation sets out what elements of a worker’s pay should be included when calculating their holiday pay.  Previously the position was set out solely in case law and this new legislation is an attempt to clarify the existing position.

The Working Time Regulations 1998 state that all workers are entitled to 5.6 weeks’ annual leave in each leave year.  The legislation states that four weeks of this entitlement must be paid at a worker’s ‘normal’ rate of pay and the remaining 1.6 weeks’ entitlement can be paid at their ‘basic’ rate of pay.  Employers who are going to pay two different rates of holiday pay to these workers should consider how they will distinguish between the two different entitlements to holiday (i.e. the 4 weeks’ holiday entitlement and the 1.6 weeks’ holiday entitlement).  The Government guidance on this issue suggests setting it out clearly in a contract of employment or staff handbook. Alternatively, employers may instead decide that they will treat all holiday in the same way as ‘one pot’ of holiday entitlement and pay all holiday at the higher ‘normal’ rate of pay as it is administratively simpler to do so even though it may cost the employer more.

The new legislation states that from 1 January 2024 the following must be included when calculating a worker’s ‘normal’ rate of pay:

• Payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged under their contract to carry out.
• Payments for professional or personal status relating to length of service, seniority or professional qualifications.
• Payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks proceeding the calculation date.

These new rules do not affect workers with no normal working hours, or workers with normal working hours whose pay varies by reference to the times or days on which the work is done or the amount of work done.   These workers should already have all elements of their remuneration taken into account in the 52-week averaging calculation under the previous week’s pay rules.

The new rules will largely affect those workers with normal working hours who earn a basic salary but with additional elements such as commission, overtime payments or other allowances. These workers should have the additional pay elements as listed in the bullet points above included in their holiday pay by having the average weekly amount of these payments paid over the 52 weeks prior to the start of the holiday added to the amount of their basic weekly pay.  Weeks where no remuneration was payable to the worker and weeks where the worker was on statutory leave or sick leave are ignored and earlier weeks are taken into account where possible.  However, the period used for the calculation should not go back more than 104 complete weeks before the start of the holiday.

The new legislation is silent on the issue of annual bonuses and whether these should be included in ‘normal’ pay for holiday pay purposes.  Therefore this issue is one area where uncertainty remains.

The new legislation also creates a new category of workers for those who are irregular hours or part-year workers as defined in the legislation. From 1 April 2024, for all leave years starting on or after this date, all holiday taken by part-year or irregular hours workers should be paid at the rate of ‘normal remuneration’ i.e. their average pay over a 52 week period prior to the holiday being taken.  For these workers their holiday entitlement is treated as one single holiday entitlement of 5.6 weeks’ rather than two separate entitlements (i.e. 4 weeks’ and 1.6 weeks’).

Holiday pay remains a tricky area for employers to navigate and therefore if you are unsure about the best approach for your business please contact us on employment@warnergoodman.co.uk or call 023 8071 7717.