Change to Holiday Pay Calculation

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The way that an employer needs to calculate holiday pay changed on 6th April, 2020 for those employees with contracts drawn up under the Employment Rights Act 1996.

The first four weeks, or 20 days, of holiday entitlement must now be calculated based on the average of the employee’s earnings over the 52 weeks before the start of the holiday. If the employee has worked for less than 52 weeks, then the holiday pay will be calculated as an average of the weeks they have worked.

A note of caution….. If an employee works irregular hours and does not work some weeks, then the employer will be required to go back and calculate the average of the previous 52 weeks that the employee worked. This means an employer may be required to go back a maximum of 104 weeks to retrieve 52 weeks of pay.

This entitlement for the first four weeks is based on “normal remuneration” which includes commission, bonus and any overtime. The additional 1.6 weeks, or 8 days, which are often taken as bank holidays but still included in the statutory minimum holiday entitlement are based on “the value of a week’s pay” and so therefore can be taken at basic pay rate. It is not permissible to make payment in lieu of any of the 5.6 weeks’ holiday unless the contract is terminated.

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