Calculating holiday entitlement can be confusing. Employees are legally entitled to have 20 days paid holiday plus 8 bank holidays each year. If the employee works part time their entitlement is based on the number of days each week they work. For example, if they work 2 days a week they would be entitled to 2/5ths of 20 days and 2/5ths of the 8 bank holidays.
Employees must take the minimum holiday entitlement of 28 days (pro rata if part-time) during the holiday year. An employer cannot pay them for unused holiday, except if they are leaving during the year, as it is a legal requirement to have this time off from work and be paid for it. The only time an employer must allow an employee to carry over holiday entitlement is when they return from maternity leave or sickness as employees continue to accrue holiday during this time. Aside from this it will be at the employer's discretion or as set out in the contract of employment.
Most companies will have a leave year starting in January but the leave year can start at any time. If the leave year is not set out in the employee's contract of employment it will be calculated from the employee's start date. This is OK if you have only one employee but can get confusing if you have a growing number of employees and each one has a different holiday year.
Employees begin to accrue paid holiday entitlement from the day they start work and by the end of month one full time employees will have accrued 2.33 days based on the minimum legal requirement, more if the company gives more than 20 days holiday per year.
An employee who starts work part way through the year for a company which has a leave year starting in January will have their leave entitlement calculated for the remainder of the year until 31st December. For example if they start on 1st October they will be entitled to take and be paid for 7 days (1/4 of 28 days). This 7 days will include 2 bank holiday days for Christmas Day and Boxing Day leaving them with 5 days to take.
An employer may require employees to take holiday at set times of the year when the company closes down, for example at Christmas.
An employee who leaves part way through the year will have their entitlement calculated from the start of the leave year until their leaving date and will be paid for any holiday they have not used or they may be deducted for any holiday they have taken in excess of their entitlement. For example if they leave at the end of June they will be entitled to 14 days paid holiday which will include the 5 bank holidays between January and June leaving them a balance of 9 that they could use over that period.
These two calculations are based on employees working 5 days a week. An employee who works less than 5 days a week will have less entitlement. An employee who works 3 days a week, Monday to Wednesday, and leaves at the end of June will be entitled to 8.4 days ( 3/5ths of 14 days). They will have used at least 3 or 4 of these days for bank holidays (Easter Monday, 2 May Bank holidays and possibly New Year's Day), leaving them 4.4 or 5.4 days of holiday entitlement for the six months.
Holiday entitlement calculations are always rounded up and not down.
The way holiday entitlement is calculated for employees working irregular hours, casual workers, shift workers and workers with zero hours contracts changed at 1 April 2020. It is now calculated based on average pay over the previous 52 worked weeks. If there is no pay for any of those 52 weeks then you keep going back a week to a maximum of 104 weeks until you have 52 weeks of paid work to use for the calculation. If the employee has not worked 52 weeks then you would use an average of pay over the number of weeks worked. This calculation ensures these employees are paid based on average earnings not on what they have earned over the last 12 weeks as previously. This calculation must be done and the average amount for the day or week paid to the employee when they take holiday . The employee must take the time off and not be paid whilst continuing to work.
This is a complicated calculation and could result in the employee being entitled to more than 28 days paid holiday. As an employer you are only required to pay them for the equivalent of 28 days (or pro rata) unless you have a higher holiday entitlement in their contract of employment.
For help calculating holiday entitlement for your employee you can use the HMRC Holiday Calculator or for help with this and other aspects of calculating pay for employees starting and leaving contact us for outsourced payroll support.