Calculating Holiday Pay

Employers must correctly calculate holiday pay to comply with UK employment law. Incorrect calculation can lead to tribunal claims for underpayment, unlawful deductions and accrued holiday pay on termination.

Statutory Holiday Entitlement – Overview

Under UK law, most workers are entitled to a minimum of 5.6 weeks’ paid annual leave in each leave year. This equates to:

• 28 days for a full-time employee working 5 days per week
• a pro-rata equivalent for part-time workers
• Employers can provide contractual holiday entitlement that is more generous than the statutory minimum, but not less.

What Counts as Holiday Pay?

Holiday pay must reflect a worker’s normal remuneration so that they do not suffer a financial disadvantage while taking annual leave.

Holiday pay generally includes:

• normal basic pay
• commission and bonuses where they are intrinsically linked to the performance of the job
• overtime that is regular and settled as part of normal remuneration
• other payments that are considered part of normal pay

What is included will depend on the nature of the payment and whether it is linked to the task performed during the leave period.

Calculating Holiday Pay – Basic Example (Fixed Salary)

For a worker with fixed weekly pay, holiday pay is typically their normal weekly pay.

For salaried workers, holiday pay is often simple if pay does not fluctuate.

Calculating Holiday Pay – Variable or Irregular Hours

For workers with variable pay, holiday pay must reflect average earnings to ensure fairness.

Where hours vary, holiday pay is usually calculated based on an average of pay received over a reference period. In many cases this is:

• the last 52 weeks of relevant pay, excluding weeks in which no pay was received

The average is then used to determine a daily or weekly holiday pay rate.

For example:

1. Add up total pay received over the reference period (excl. weeks with no pay)
2. Divide by the number of weeks worked to get an average weekly pay
3. Use that average to calculate holiday pay for taken or accrued leave

This method ensures that variable pay such as irregular hours, overtime and commission are fairly reflected.

Calculating Holiday Pay on Termination

When employment ends and a worker has unused holiday entitlement, employers must pay accrued but untaken holiday.

Accrued holiday pay on termination is generally calculated using the same method as for normal holiday pay, taking into account:

• total leave entitlement for the year
• the portion of the year worked
• average pay for variable hours where applicable

Failing to pay accrued holiday on termination can lead to claims for unlawful deduction from wages or breach of contract.

Inclusive and Exclusive Pay Elements

When calculating holiday pay, employers need to decide whether certain pay elements are included or excluded from the holiday pay calculation:

Included (where linked to normal work)

• basic pay
• regular overtime
• commission linked to performance
• bonuses that reflect performance in leave period

Excluded (not part of normal pay)

• discretionary bonuses
• expense reimbursements
• benefits in kind not tied to work performance

Careful analysis is needed. Simple inclusion or exclusion without legal justification can lead to underpayment and disputes.

Common Employer Pitfalls

Employers often make errors such as:

• using a 12.07% accrual method without checking whether it applies
• failing to include regular overtime or commission in holiday pay
• not calculating holiday pay for irregular hours or casual workers
• not paying accrued holiday on termination

These mistakes can lead to tribunal claims for:

• underpayment of wages
• unlawful deductions
• breach of contract

Early review and clear documentation help avoid these issues.

How We Support Employers

Holiday pay law is complex and often fact-sensitive. Our employment solicitors can assist employers with:

• drafting or reviewing holiday pay policies
• advising on calculations for variable hours and irregular work
• defending claims for holiday pay underpayment
• reviewing contracts to ensure holiday entitlement compliance

Accurate, fair holiday pay practices reduce legal risk and support workforce engagement.