I am calculating holiday pay for an employee who is leaving us.  How do I calculate what they are owed?

If your contract of employment is silent on the matter you will have to calculate the holiday they are owed using 1/365th of their normal salary. This is because Section 2 of the Apportionment Act 1890 provides that ‘all periodical payments in the nature of income… shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly’.

This is why, when I’m drafting a contract, I will often include a provision saying that deductions will be made at 1/260th of annual salary, this latter figure being the number of working days in a year after you take off weekends. For example, if somebody earns £26,000, 1/365th is £71.23 per day. If it is 1/260th it will be £100 a day – with the latter if the employee has taken more holiday than they have accrued it will work in your favour, when you make a deduction, assuming that you have set out in your contract that that’s what you will do if they have taken too many days off.

The actual calculation itself will depend on whether the employee works normal hours or not.It’s easy for a salaried person who just gets their salary with no other allowances or anything. You can just work out the day rate at 1/260th normal salary and then calculate how many days holiday they have accrued. So if someone has worked for 4 months out of 12 in the holiday year they are entitled to 1/6th of their annual entitlement.If that was 28 days that would be 5 days (4.66 rounded up).

If the employee works variable hours or has allowances or overtime or commission to be considered you would need to take an average of their earnings over the last 12 weeks to work out what the day rate will be before you can apply it.

In addition to looking at basic salary, of course, following the run of recent cases, we need to also consider other payments that might be payable during any period of holiday. This might be an average payment for commission, or overtime, or other allowances and bonuses that are paid to staff during normal working periods. If you did not make these payments during periods of holiday then, arguably, it disincentivises somebody from taking their holiday. I have recently come across an example where staff who worked on the night shift were paid at a higher rate than the normal day rate but if they went on holiday they would only get the day rate – that is clearly going to disincentivise somebody from taking holiday from their night work.

There is a calculator at www.gov.uk/calculate-your-holiday-entitlement. Annual leave accrues as soon as somebody commences their employment. In their first year of employment they are likely to have a pro-rated entitlement proportionate to the amount of the leave year which is left.

It is worth noting that if you haven’t set out in a contract what the leave year looks like (e.g. financial year or calendar year) then the first day of their new job will be the commencement of the holiday year if the employee started with you after 1st October 1998. If they commenced prior to that then 1st October will be taken as the beginning of the leave year.

If you’ve got any queries or questions, just contact me