Holiday Pay: Calculating Entitlement and Pay

An increasing number of employees, particularly those without standard working hours, are challenging their employers in tribunals over whether they are getting a fair deal on holiday pay.

One of the main discussion points has involved how commission-based employees’ holiday pay should be calculated. Employees on other forms of variable pay, or who receive shift premiums, overtime pay, or discretionary bonuses, could also have claims against their employer if these aspects of their pay are not accounted for in their holiday pay.

Employers are now having to rethink their holiday pay to avoid footing an expensive bill for back pay later. According to UK law, you must give your employees 5.6 weeks of paid leave every year.

This is easy to work out when it comes to full-time employees on a standard 5 day, 40-hour work week. They will get 28 days of paid holiday per year. It is also easy to work out for employees who work regular, predictable shifts. You simply multiply their number of working days each week by 5.6 to find their annual entitlement.

But what about employees with irregular working patterns? Casual workers, or employees on zero hour contracts, are still entitled to statutory holiday entitlement.

Holiday entitlement for casual workers

The easiest way to work out holiday entitlement for casual workers, is to give them an accrued entitlement. This means they earn holiday entitlement based on the amount of hours they have actually worked.

To make sure employees accrue the UK minimum of 5.6 weeks of paid leave, you can use the rule of 12.07%. In other words, for each hour an employee works, they earn 7.242 minutes’ holiday entitlement.

For example, if an employee works two 8-hour shifts per week for four weeks, then they will have accrued 7.7248 hours’ holiday entitlement – meaning they’ll be able to book the equivalent of nearly one shift off work, and still get paid.

You can include bank holidays as part of your employees’ holiday entitlements if your business does not operate during bank holidays. This reduces the number of days your employees can book as paid leave but ensures they are paid for bank holidays.

Calculating Holiday Pay

Calculating the amount of pay an employee or worker should receive when on holiday used to be fairly straightforward.  However, recent decisions have made the calculation of holiday pay more complicated, and in some cases more expensive for employers.

EU law requires that employees receive their ‘norma’ pay when taking holiday – meaning any payments that are “intrinsically linked to the tasks performed” should be included when paying an employee’s holiday pay. In cases where overtime is required by the employer and other payments like shift allowances and travel allowances, these might need to be included in the calculation for pay.

Averaging Periods

Employers are required to pay an employee’s ‘normal pay’ for holiday leave. Where employees have a settled pattern of work, without variable payments such as commission, it is easy to identify ‘normal remuneration’. Where employees have no settled pattern of work or receive variable payments (such as shift workers, commission-based roles and so on) a key question is deciding on a representative reference period to use when calculating the average ‘normal pay’ for the worker.


It is advisable to include the following elements in the calculation for a minimum of four weeks of the 5.6 weeks’ annual statutory holiday leave:

  • commission
  • guaranteed and compulsory overtime
  • non-guaranteed but compulsory overtime
  • productivity, attendance and performance bonuses
  • standby and call out payments
  • shift premiums
  • acting up payments.

Will not including these additional payments in holiday pay calculations make employers liable for back pay?

Not necessarily, because even if employers have failed to pay the correct holiday pay, whether or not an employee can bring a claim is likely to depend on the employee’s holiday entitlement and pattern, and when the claim is brought, as claims would have to be based on a series of potentially unlawful deductions.

The key to deciding what needs to be included is to decide what is ‘normal’ and what is ‘regular’.

What is ‘normal’ – this includes a time element, as payment has to be made for a sufficient period of time to justify the label ‘normal’. 

What is ‘regular’ – this is not clear, however there has to be a difference between an employee who works beyond their basic hours every week, and an employee who works the odd extra hour only a few times a year.