How to calculate employee holiday entitlement

Accountants for the Travel Industry

At first glance, how to calculate employee holiday entitlement may seem quite easy and straightforward. According to UK law, an employee should receive at least a certain number of days per year. This means that as long as they are getting the right number of days granted them by law, then everything should be fine, right?

Well, of course this is quite fine for employees working a standard 5-day, 35-40 hour week. But what if your employee works part time, or a mixture of short and long shifts ? What if they are employed under a zero-hours contract, with no set hours? And how do you calculate their remaining days accrued if they leave halfway through the year?

Don’t worry about it ! LAS Accounting are here to take care of all these detailed calculations so that you can rest easy knowing your employees are getting what they are entitled to and that you are neither overpaying them nor getting on the wrong side of the law. In the following we look closely at how to calculate employee holiday entitlement.

What is the statutory holiday entitlement in the UK ?

In the UK, statutory holiday entitlement is prescribed for in law and entitles an employee to 5.6 weeks paid leave or 28 days (whichever is lower) each year. This is also more commonly known as annual leave. So for an employee working standard shifts (i.e., shifts of the same length each day) over 5 days a week, the annual leave is 5.6 weeks which equals 28 days.

However, it must be noted that an employee working more than 5 days a week will never be entitled to more than 28 days statutory leave, because the entitlement is the lower of 5.6 weeks or 28 days. However, while this is the minimum amount an employee must receive, many employment contracts entitle workers to additional paid annual leave beyond the statutory allowance.

Almost all workers are entitled to this allowance, including agency workers, workers with irregular hours and those on zero-hours contracts. Where things become difficult is making sure that workers in non-standard working patterns are receiving their proper statutory entitlement.

Does the statutory 28 days include bank holidays ?

If the business is closed on bank holidays, employers are allowed to include these in the 28 days and require employees to use an annual leave day to cover them. This is because bank holidays would still count as paid leave, so the individual is not receiving less than their minimum allowance. It is instead a restriction on how some of that allowance is to be used.

If the business is not closed on bank holidays, then the 28 days allowance will not include them as mandatory, and it will be down to the employee to decide if they want to use an annual leave day to cover them or not.

How to calculate the employee holiday entitlement for a part time employee ?

If your employee works part time, how you calculate their leave will depend on whether they work shifts of standard length and over how many days they work their shifts.

The good news is that if your part time employee works the same 5-day week but with shorter shifts, then there is no calculation needed. They are entitled to the same 28 days as full-time employees because they work the same number of days.

Many employers wrongly believe that all part time employees should have a lower annual leave entitlement just because they work fewer hours. This is incorrect, and employers calculating their part time employees’ leave in this way could be storing up trouble for themselves further down the line.

Where the employee works less than five days a week, but still has fixed days and regular shifts, you can work out their annual leave entitlement by multiplying the number of days worked per week by 5.6. So if they work three days per week: 3 x 5.6 = 16.8 days. Their entitlement is therefore 16.8 days per year.

Do note that while entitlement can be rounded up to the next whole or half day it should never be rounded down, as this would mean the employee was receiving less than their statutory amount.

How to calculate the annual leave entitlement for an employee working varying shifts ?

If you have an employee who works a set number of hours per week, over a set number of days, but works varying hours on each of those days, then HMRC’s guidance is to calculate their leave entitlement in hours based on the average length of a working day.

For example, you have an employee who works 25 hours per week over 4 days. To find their entitlement in days, we carry out the same calculation: 4 x 5.6 = 22.4 days. However, this employee doesn’t work shifts of the same length each day. On Monday and Tuesday, they work 7.5 hours, but 5 hours on Thursday and Friday – meaning they could essentially receive more or less paid leave per year depending on which days they chose to take it on.

To work around this, we first find the average length of the employee’s shift. In this case, 25 hours divided by 4 days, which equals 6.25 hours. This is an average workday, and so the employee should receive 22.4 of these average days.

22.4 x 6.25 = 140 hours, meaning the employee’s annual leave entitlement for the year is 140 hours. If they took a leave day on a Monday, we would deduct 7.5 hours from this total, or if they took leave on a Friday we would deduct 5 hours.

This method also applies where the employee is contracted to a set number of hours and days per week but does not have a set shift pattern, i.e. some Mondays they do 7.5 hours but some they do 5, or the days that they work each week change. What matters is that the number of days and number of hours are set by the employment contract.

How to calculate the annual leave entitlement for an employee on a zero-hours contract ?

Workers employed under a zero-hours contract have a lot of flexibility in how they work. Though they are not guaranteed any set hours each week, they are still entitled to the statutory 5.6 weeks leave. How to calculate employee holiday entitlement for these employees may prove challenging, because you may not know how many hours they are likely to work across the year.

Instead of being automatically entitled to a certain number of days/hours based on their contract, zero-hours workers accrue their holiday allowance by carrying out work for their employer. Each hour that they work entitles them to roughly 7 minutes of annual leave (7.242 minutes to be exact).

This is because 5.6 weeks is 12.07% of a 52-week year, and 7.242 minutes is 12.07% of an hour. Zero-hours workers should receive the same 12.07% of the time they work as paid leave. You can therefore multiply the total number of hours your zero-hours employee has worked for you by 0.1207 to arrive at their accrued holiday amount.

For example, your employee has worked 133 hours. 133 x 0.1207 = 16.05 hours. They would then be entitled to 16.05 hours of paid leave.

Many employers allow zero-hours employees to take annual leave days in anticipation of future accrual, rather than strictly limiting them to the number that they have already accrued. This can sometimes lead to an overpayment of holiday pay, if the employee then leaves or does not work as many hours as anticipated. Employers are entitled to reclaim any such overpayment from the employee’s wages.

How does annual leave accrual work ?

As we have already seen, employees are entitled to the statutory 5.6 weeks each year. It is assumed that they will work for their employer for the entire year, so many employers allow their employees to use their leave as they choose and do not limit them to the number of days already accrued. Accrual will usually only be an issue where an employee starts or leaves part way through the year.

There are varying rules on how annual leave is accrued depending on how long the employee has worked for you. Employees in their first 12 months (before the leave year resets) accrue their leave differently to those who have worked since the beginning of the leave year.

Unless an employee starts work at the very beginning of the leave year, their allowance will be calculated pro rata to reflect the part of the year that they did not work for that employer. So, if they started halfway through the year, they would receive half of their annual allowance.

Most employers will have a set annual leave year usually, but not necessarily, running from January to December. This dictates when their employees’ allowances reset. It is easier for an employer to keep track of the annual leave entitlement when the dates used are the same for everyone, rather than having a separate leave year for each employee which resets on the anniversary of their joining the company.

A worker in their first 12 months accrues 1/12 of their annual allowance on the first day of each month. This can be the first calendar day, or the monthly anniversary of their first day of employment. For example, if they started on the 15th of the month, they would accrue 1/12 every 15th of the month. HMRC suggests that the second option is fairer and more likely to be correct, although this is not legally binding.

For example, an employee entitled to 28 days per year who started on 1 July would accrue 14 days by 31 December – 2.33 days on 1 July, 2.33 on 1 August, so on and so forth. Where the total prorated amount for the year includes a partial day, this should always be rounded up to the next half day. So, 2.36 days become 2.5, and 6.86 days become 7. You are not required to round to the next full day.

How to calculate an employee’s accrued holiday when they leave ?

According to UK law, you need to pay your employee for any annual leave they have accrued but not taken. This is so that employees leaving employment or switching employer are not disadvantaged.

Similarly, if an employee has taken their full entitlement before leaving the employment part way through the year, then they will have been overpaid holiday pay, which the employer is entitled to recover. It is therefore important to pay attention to a soon-to-be ex-employee’s leave entitlement.

Calculating a pro rata allowance for a leaver is different than for an employee in their first 12 months. The proportion of leave they are entitled to should reflect the proportion of the year they were employed, and the legislation says that this should be calculated on calendar days in employment, not only on days worked.

For example, if the leave year starts on 1 January and your employee leaves on 7 August, they would have been employed by you for 219 calendar days out of 365 (220 out of 366 if it was a leap year). 219 days is 60% of the full year, so they would be entitled to 60% of their annual allowance.

For zero-hours workers, you would instead calculate how much leave they had accrued by checking how many hours they had worked in the current leave year.

You would then deduct any days that they had already taken (including any days they might be using to cover their notice period) from their prorated annual allowance. If they have more days accrued than taken, you need to pay them for these days when they leave. If they have more days taken than accrued, then you are entitled to recover those days from their final pay.

Do employees accrue annual leave when they are off sick ?

As long as they are still employed, they will continue to accrue annual leave when they are off sick. This also applies to all kinds of leave, such as maternity, paternity, adoption, etc.

The only difference is with employees on a zero-hours contract: they will not accrue leave unless they are working. You will need to refer to the above sections in order to know how to calculate employee holiday entitlement for these employees.

Can annual leave days be carried over from one year to the next in the UK ?

Of the statutory 5.6 week, 4 weeks are covered by the Working Time Regulations 1998 and carrying these over are different to the remaining 1.6 weeks.

These 4 weeks usually cannot be carried over into the new leave year, so if they are not taken, they will be lost. Also, employees cannot be paid for any days in lieu of taking them unless they are leaving the business. This is because the spirit of the legislation is to guarantee employees paid time away from work and paying them for not taking it would be effectively encouraging them not to do so.

The remaining 1.6 weeks can be carried over, however there should be a written agreement between the employer and employee to this affect, clearly stipulated in the employment contract. Where an agreement exists, those days can be carried over.

Lastly, any additional leave over and above the statutory 5.6 weeks is left to the employer to decide whether employees can carry it over or not.

And this is everything you need to know about how to calculate employee holiday entitlement. Remember to get in touch with LAS Accounting if you need further business advice or help with your accounting.

If you find any of these overwhelming, you may want to consider delegating the annual leave computations to our Payroll Service Bureau.

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