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Demystifying holiday pay: A guide for employers

Calculating holiday pay can be a complex compliance challenge, even for the most seasoned HR professionals. In this guide, we demystify holiday pay in a way that’s both practical and accessible. We start with a recap of the basic right to take holidays before delving into the related topic of holiday pay, covering recent changes that took effect in 2024.

Holidays: the basics

Who can take holidays?

All ‘workers’ have a statutory right to take holidays under the Working Time Regulations 1998 (WTR 1998). The statutory definition of a ‘worker’ includes all of your fully-fledged employees as well as a broader category of staff performing services for you personally including casual or zero-hours staff, freelancers and agency workers.

Self-employed independent contractors do not have statutory rights to take holiday. However, you should review your arrangements with independent contractors to ensure they are genuinely self-employed. There have been many cases where individuals classified as independent contractors have been found by employment tribunals to be employees or workers and therefore entitled to broader employment protections, including the right to take and be paid for holidays.

Getting an individual’s employment status wrong can have serious legal and financial implications - seek advice from an employment solicitor if you have any questions about someone’s employment status.

How much holiday can workers take?

The statutory holiday entitlement in the UK for all workers is 5.6 weeks of leave a year, prorated for part-time workers and workers who start part-way through your holiday year. Workers don’t need any minimum service to take statutory holidays.

The total 5.6 weeks’ leave is made up of the following:

  • 4 weeks leave created under pre-Brexit European Union laws ('Basic Leave').
  • 1.6 weeks of leave created under domestic UK laws ('Additional Leave').

Try not to worry too much about the distinction between Basic and Additional Leave for now - we will make it clear when this distinction is relevant in this guide.

The 5.6 weeks of leave is known as ‘statutory holiday entitlement’. There are some sectors where more generous leave is provided under a worker’s terms and conditions which is known as ‘contractual holiday entitlement’. This article focuses on statutory holiday entitlement.

How do workers take holidays?

Workers have to give you notice to take holiday. The notice has to be at least twice as many calendar days as the number of working days the worker wishes to take off as holiday. For example, if a full-time employee working Monday to Friday wants to take a week off as holiday (ie 5 working days), they would need to give you at least 10 calendar days’ notice. On an operational level, most employers have automated holiday booking procedures integrated into their HR information systems to streamline and log requests.

Can we refuse holiday requests?

Yes, you can refuse a worker’s holiday request by giving the worker counter-notice. The counter-notice needs to be at least as many calendar days before the start of the worker’s holiday as the number of days you are refusing. For example, if a sales employee requests five working days off as holiday and you want to refuse the entire request because they would be on holiday during a business-critical period such as end of quarter, you can refuse the request by giving the employee five calendar days’ notice before their holiday is due to begin.

If you’re thinking of refusing a worker’s holiday request, you should try to do so as a last resort and on justifiable business grounds. You should avoid systematically refusing requests in a way that prevents a worker from taking holidays throughout the year. This could give rise to legal claims under the WTR 1998 and serious breaches could become a health and safety issue reportable to the Health and Safety Executive.

Can holidays be carried over?

Yes, but there are different rules depending on whether the worker is carrying over Basic Leave or Additional Leave.

Basic Leave generally has to be taken in the leave year to which it relates. That means that workers cannot normally carry over Basic Leave into a subsequent leave year and workers must ‘use or lose’ their holiday entitlement. However, legislation which took effect on 1 January 2024 now makes it possible for workers to carry over Basic Leave in the following circumstances:

  • where the worker was unable to take holiday because they were on maternity, other family-friendly leave or sick leave.
  • where the employer failed to recognise a worker’s right to take holiday, failed to give the worker a reasonable opportunity or encourage the worker to take holiday, or failed to inform the worker that they will lose any Basic Leave not taken by the end of the leave year.

Additional Leave can only be carried over into a subsequent leave year if a worker’s terms and conditions allow it, or if the worker was unable to take Additional Leave because they were on maternity or other family-friendly leave.

Holiday pay: the basics

Do we have to pay workers for taking holidays?

Yes. In addition to providing workers with the right to take holidays, the WTR 1998 requires employers to pay workers during time off for holidays.

What do we need to include as holiday pay?

Holiday pay calculations are notoriously complex, but we aim to simplify the rules in this section. Legislation introduced with effect from 1 January 2024 has made it slightly easier to navigate the rules in that you mainly need to look at whether the worker is taking Basic or Additional Leave.

Type of leaveHoliday pay entitlementHoliday pay components
Basic Leave‘Normal pay’‘Normal pay means:   Basic salary / wages   Commission payments   Overtime regularly paid to the worker over the past 52 weeks   Seniority / professional status payments   You would need to take the average weekly amount of each of the above payments in the past 52 weeks and factor these into the worker’s holiday pay calculation.
Additional Leave‘A week’s pay’The calculation of a ‘week’s pay’ for holiday pay purposes depends on factors such as the worker’s hours of work and whether they receive fixed or variable pay. This can be quite complex so you may wish to seek advice if your business distinguishes between Basic and Additional Leave when calculating holiday pay.

For simplicity, many employers choose to simply pay the full 5.6 weeks of Basic and Additional Leave under the ‘normal pay’ rules, although this is a more costly approach. Although recent legislation does simplify the approach to holiday pay calculations, this is still a very complex area of employment law - do contact our employment law solicitors for full guidance.

When do we need to pay holiday pay?

You should process holiday payments in the same payroll month in which the worker took the holiday. It is not possible to pay workers in lieu of unused holiday during employment. You can only do this on termination of employment. This means that if workers don’t take their accrued holiday during a holiday year and cannot carry it over, you don’t need to pay them for it.

What happens to holiday pay if someone leaves our business?

If there is any unused holiday Basic or Additional Leave on termination of employment, the worker is entitled to be paid in lieu for it, calculated up to the date of termination. Again, these calculations can be complex and there are different strategies for managing holiday pay balances when a staff member leaves your business - our employment law solicitors are on hand to help.

How do we process holiday pay for staff with irregular hours?

For leave years beginning on or after 1 April 2024, there is a new system for calculating holiday pay for ‘irregular hours’ and ‘part-year’ workers.

  • Irregular hours worker. These are workers whose hours of work wholly or mostly vary during the year, such as zero-hours and agency workers.
  • Part-year workers. These are workers who are only required to work part of the year and do not work for at least one week of the year, for example hourly term-time workers.

For these workers, holiday pay is calculated in hours rather than weeks. You calculate their holiday pay at the rate of 12.07% of hours worked in the pay period (ie the frequency with which the worker is paid eg weekly, monthly). The rate is 12.07% because 5.6 weeks of statutory holiday is 12.07% of the total number of working weeks in a year of 46.4 weeks.

What is rolled-up holiday pay and is it legal?

Rolled-up holiday pay involves paying workers their holiday entitlement as part of their regular wages or salary, rather than separately it out as paid time off when they take holidays. This practice was previously ruled unlawful under European Union laws, but this is now lawful in the UK in limited circumstances.

For holiday years starting on or after 1 April 2024, it is now possible to roll-up holiday pay for irregular and part-year workers. It remains unlawful to use a rolled-up approach to holiday pay for anyone other than an irregular or part-year worker.

If opting for the rolled-up holiday pay approach for irregular or part-year workers, you will need to:

  • Calculate rolled-up holiday pay at the rate of 12.07% of hours worked in the previous pay period.
  • Inform staff that you are using a rolled-up approach to holiday pay.
  • Itemise the rolled-up holiday pay on the worker’s pay slip.
  • Pay the rolled-up holiday pay at the same time as the worker is paid for the work done in the pay period.

It’s not compulsory to use a rolled-up approach to holiday pay for irregular or part-year workers. Government guidance makes it clear that you can continue to take a worker’s average pay over a 52-week reference period that applies for workers with variable hours to calculate holiday pay. You might choose to do this where, for example, an irregular or part-year worker has been absent for part of the year (eg on family-friendly leave).

Do we need to pay holiday pay to staff on sick leave or family-friendly leave?

Statutory holiday entitlement continues to accrue for staff on sick leave. Staff on sick leave are also allowed to use their holiday entitlement while off sick. This means you’d need to pause their statutory or company sick pay entitlements and process holiday pay for the holiday period instead - they can’t receive both. It’s generally uncommon for staff to book time off for holidays during sick leave, but there are some instances of ill-health absence where this might be encouraged, such as managing mental health related illness.

Staff on family-friendly leave (eg maternity, paternity, adoption, shared parental leave and carer’s leave) also continue to accrue holiday entitlement during their time off. However, they can’t take holidays during their leave so you won’t need to worry about processing holiday pay during their time off.

Holidays and holiday pay: legal risks

Workers can bring a number of claims against employers in an employment tribunal related to holidays and holiday pay. It’s therefore important to make sure you have systems and processes in place to encourage workers to use their holiday entitlement (subject to the demands of your business) and to pay them correctly when they take holidays.

Employer actionType of claimRemedy
Refusing to allow a worker to use their statutory holiday entitlement and / or failure to pay all or part of any holiday pay.A worker can bring claims under the WTR 1998 in an employment tribunal.  For refusal to allow a worker to use their statutory holiday entitlement, an employment tribunal will make a declaration that the employer refused statutory holiday and award such compensation that is just and equitable in the circumstances.   For failure to pay holiday pay correctly or failing to pay in lieu of holiday on termination, an employment tribunal will order an employer to pay the amount due.
Failure to pay all or any part of holiday pay.A worker can bring claims for unlawful deductions from wages under the Employment Rights Act 1996.An employment tribunal will make a declaration that the deductions were unlawful and order the employer to pay the amount deducted. The tribunal may also award financial compensation for any financial loss suffered by the worker if it considers it appropriate.
Dismissing an employee because they have refused (or proposed to refuse) to forgo a right under the WTR 1998.Employees (as opposed to workers) can bring claims for automatic unfair dismissal in an employment tribunal.Basic award based on length of service, capped weekly pay and age.
Compensatory award, the maximum of which is the lower of the statutory cap  or 52 weeks' actual gross pay.

Of the above, claims for unlawful deductions from wages are perhaps the most significant liability for employers. Unlike claims under the WTR 1998, these claims could cover historic underpayments of holiday pay going back two years before the date of the claim. This means that if a worker’s holiday pay has been incorrectly calculated for some time, they could bring a claim in an employment tribunal and frame the incorrect payments as a ‘series of deductions’ from their wages. This is why workers tend to bring unlawful deductions claims, rather than claims under the WTR 1998, for underpaid holiday pay.

Holiday pay claims have been very topical in recent years where some employers, particularly in the gig economy, had misclassified workers as independent contractors and had not paid any holiday pay to them. This resulted in individuals bringing claims in employment tribunals arguing that their employment status was that of a worker and not an independent contractor and that as a consequence, they were owed statutory rights such as holiday pay. The financial cost to employers in this context can be very large where large portions of a workforce have been misclassified as contractors than workers.

For these reasons, employers review their approach to holiday pay calculations as well as their arrangements with independent contractors to review the risk of historic holiday pay liabilities. It’s also good practice to review arrangements with independent contractors generally to make sure there are no other liabilities that could arise, for example unfair dismissal claims on terminating an independent contractor’s agreement or liabilities under IR35.

Holiday pay in practice: solutions

Holiday pay can be complex and there can be significant financial consequences for non-compliance. If you need support with your holiday pay calculations or you think there may be liability for historic underpayments of holiday pay within your business, our practical, friendly and highly experienced employment solicitors are on hand to provide tailored advice. Whatever you decide to do, we leave you with some practical tips to help you comply with holiday pay laws:

  • Implement effective holiday management systems: Establish clear systems and procedures for workers to request holidays, including providing notice requirements and channels for submitting requests. Ensure these systems are easily accessible and well-communicated to all staff.
  • Streamline holiday pay processes: Implement efficient payroll systems that can accurately calculate and process holiday pay in a timely manner. Integrate holiday pay calculations seamlessly into your existing payroll processes to ensure workers are paid correctly and promptly for their holidays.
  • Review your holiday pay practices. There have been a number of changes to holiday pay calculations in 2024. This includes confirmation that commission, regular overtime and professional status payments must be included in the calculations for Basic Leave and a new approach to holiday pay for irregular and part-year workers, including rolled-up holiday pay. Review your approach to holiday pay with your finance and payroll teams to check you are calculating it correctly.
  • Workforce audit: Regularly review and clarify your workforce arrangements for any potential misclassification of workers as independent contractors to identify any historic holiday pay liability.
  • Stay up to date on developments: Holiday pay is still a developing area of employment law. Regularly monitor updates and changes in holiday pay legislation and case law to ensure compliance with evolving regulations. If you use an external payroll provider, make sure they are up to date on the latest holiday pay developments too. Subscribe to our newsletter and attend one of our events and webinars to stay up to date.
  • Seek legal advice when needed: If you need support with your approach to holiday pay calculations or you think there may be liability for historic underpayments of holiday pay within your business that you need to address, our practical, friendly and highly experienced employment solicitors are on hand to provide tailored advice.

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