For many employers, calculating holiday pay used to be fairly straightforward. If employees worked the same hours and earned the same amount every week, there was very little to think about.
However, the rules are different where pay varies. This includes people who work overtime, receive commission, work different hours each week or are employed on irregular hours.
In those situations, employers may need to calculate holiday pay using a 52-week average, which can take more time and increases the risk of mistakes.
What is the 52-week average?
Where a worker has variable pay or variable working hours, holiday pay is often based on their average weekly pay over the previous 52 paid weeks.
This is not simply the last 52 calendar weeks. If a worker had weeks where no pay was received, those weeks are usually ignored and earlier paid weeks are used instead. In some cases, employers may need to look back as far as 104 weeks to find 52 paid weeks.
This means employers need accurate payroll records and careful calculations each time leave is taken.
Why is this a challenge?
Many small businesses assume their payroll software will calculate everything automatically. Unfortunately, that is not always the case.
Calculating the correct average can become difficult when employees:
- Work different hours each week.
- Regularly work overtime.
- Receive commission or bonuses that affect holiday pay.
- Have unpaid leave during the year.
- Have seasonal working patterns.
Even a small mistake could mean an employee is underpaid or overpaid.
Why getting it right matters
Holiday pay is a legal entitlement. Incorrect calculations can lead to disputes, complaints and, in some cases, claims for unlawful deduction from wages.
Making sure holiday pay is calculated correctly helps employers stay compliant while giving employees confidence that they are being paid properly.
Keeping accurate records
The calculation is only as good as the information available.
Good payroll records make it much easier to calculate holiday pay correctly and show how the figures were reached if questions arise later.
Where can I find the official guidance?
The following official guidance explains how holiday pay should be worked out:
- Holiday entitlement: holiday pay
- Calculate holiday entitlement
- Working Time Regulations 1998
- Employment Rights Act 1996
Make the calculation easier
Working out a 52-week average manually can be time consuming, especially if employees have varying hours or pay.
If you regularly calculate holiday pay for workers with variable earnings, our Holiday Pay Calculator is there to make the process quicker and reduce the chance of errors.