Nov 10, 2024

Calculating the 52-week average holiday pay of your casual workers

The image of the average worker has gradually evolved over decades of innovation and progress, reflecting changes in employment contracts and working patterns. While full-time salaried employees adhering to a traditional 9-to-5 working pattern remain prevalent, an increasing number of positions now accommodate unique schedules, including part-time, flexible hours, and remote work.

Even with this change in worker norms, what has not changed is what workers are entitled to for fair treatment. One of the most significant entitlements that must be considered is paid time off for holidays. For all the efforts employees contribute to their organisation, recognising their holiday entitlement is crucial. Thankfully, regulations have ensured that anyone classified as a worker or employee, apart from the self-employed, is guaranteed a week of statutory annual leave, amounting to 5.6 weeks of paid time off per year.

These regulations have been in place for a long time to ensure that workers are granted necessary time-off, but recently they have been altered to suit a new workforce better.

Specifically, how many weeks an employer needs to reference for average pay and how far back they can go to look have been changed with these new regulations as of 6 April 2020. This may be a tricky concept for employers used to the previous system. For assistance with these new guidelines, we’ll go through the new rules and how you should apply them.

How has holiday pay changed?

These new regulations guide employers when calculating holiday pay for workers, especially those without fixed hours or pay. Many employers have had to adjust to a labour market that changed with pandemic conditions, so accounting for employees in more non-traditional roles and schedules is imperative.

These new regulations introduce pivotal changes to calculating holiday pay, particularly affecting those with irregular working hours or patterns. They redefine the period—now a 52-week span—for calculating average pay, including regular overtime, and set a two-year limit on referencing past pay data, which significantly impacts holiday entitlement calculations:

How many weeks employers should pull from when calculating average pay
How far back employers should look to account for these weeks

Regarding how many weeks should determine average pay, these new regulations state that employers should gather 52 weeks of pay data to determine the average salary for holiday time off. This means employers should only account for weeks where the employee received payment and disregard weeks where they did not receive an income. Previously, only 12 weeks were needed to calculate average pay, which is a significant change.

With this increase in the number of weeks needed for reference, many employers may struggle to find 52 weeks of pay data, especially for workers with non-fixed hours. Because of this, the second new addition in the regulations stipulates that employers can only go back two years (or 104 weeks). Previously this number was uncapped, so these new regulations help employers and employees.

Now, you might wonder how these new guidelines affect calculations and exceptions, especially concerning annual leave and rolled up holiday pay. We will delve into examples and explore edge cases that these regulations may present, offering clarity on applying these changes to various employment contracts.

1. Breaking Down the New Holiday Pay Formula for workers on variable hours or casual workers on fixed rates

According to HMRC, the rule is straightforward. You simply divide your employee's pay data for the last 52 weeks of income by 52. However, in practice, it’s not that simple. For example, an employee who only works on Fridays, Saturdays, and Sundays decides to take her Friday and Sunday. It’s not an entire week of holiday. Then, how much should you pay her?

In fact, in most cases, you must go beyond HMRC’s explanations and break them down the following way to cover specific issues.

Step 1: Finding the average weekly income

Gather your employee's pay data for the last 52 weeks of income. Take this total amount of income and divide it by 52. This will give you the average weekly pay for the last 52 weeks.

Equation: Total Income/ 52 = Average weekly Income for the last 52 weeks of work

From here, you would use this average weekly income as the amount you would pay your employee for taking a 1-week holiday from work. As discussed above, many holidays won’t last one exact week, so there are a few more steps to determine how much you need to pay per day of leave.

Step 2: Finding the average number of daily working hours

Now, you will want to find the average daily working hours to determine how many hours a working day for your worker on variable hours or zero hours. This will help you find the number of hours you need to pay per holiday day.

Equation: Total number of hours worked/ Total number of working days = Number of hours per day to account for.

Step 3: Finding the holiday pay

You will then multiply the employee’s hourly rate by the number of hours per day to find the amount you owe the employee for holiday pay.

Equation: Hourly rate x Number of days taken x Number of hours per working day = Holiday pay

Laying out this formula this way should have provided some help, but numbers may be the best way to demonstrate the new rules. So let’s go over some examples to see the maths in action.

A 52-Week Average Holiday Pay Scenario

So let’s use an example of a cleaning person who will come and clean your office at certain hours on particular days but isn’t a salaried employee. They are still entitled to holiday time off and pay, but you will need to use these new regulations to determine their compensation.

First, let’s make some assumptions. We have scoured our pay data and have found 52 weeks of data within the last 2 years. We have found that the total income made was £30,000; now, let’s figure out how much holiday pay this worker would be owed if they requested a week off.

So, with the total income provided, we have Step 1 out of the way.

Step 1: Finding the average weekly income

Let’s move on to Step 2 and find the average weekly income for the last 52 weeks:

£30,000 (Total Income) / 52 (Number of weeks) = £576.92 (Average Weekly Income)

With 1 week off requested, £576.92 would be the amount you owe your employee for their holiday pay.

Step 2: Finding the average number of daily working hours

Next, let’s figure out what their average daily hours will be.

1,000 (Number of hours worked during the last 52 weeks) / 150 (Number of working days in the previous 52 weeks) = 6.6 (Average number of hours per working day)

So, we have determined that for every day this employee requests off, you should pay for 6.6 hours of work.

Step 3: Finding the holiday pay

Finally, let’s calculate their holiday pay for 3 days off, assuming the employee’s hourly rate is £30.

30 (hourly rate) x 3 (days off taken) x 6.6 (average number of hours per working day) = £594

Notice that if we were to calculate the average number of working days per week for this worker, we would find 150 (total number of working days during the last 52 weeks) /52 = 2.88 days per week. This makes it very unintuitive and complicated to calculate the holiday pay of this employee.

What If You Can’t Reference 52 Weeks?

Now you may be wondering what will happen when you don’t have 52 weeks of pay data to work with. Well, in that case, these new regulations state that you should use every single week of pay data you do have up to the 104-week timeline we mentioned before.

So, let’s try this process again, but with less than 52 weeks' pay as an example during the 104-week timeline.

In this scenario, we will assume the employee has 24 weeks of pay data and has made a total income of £15000.

£15000 (Total Income) /24 (Total Weeks) = £625 (Average Weekly Pay)

We will assume this employee works 500 hours across 70 days during these 24 weeks.

500 (Total hours) / 70 (Total days) = 7.14 (Average hours worked per day)

We’ll say this employee wants to take 2 days off.

30 (Hourly rate from the previous example) x 2 (Days off taken) x 7.14 (Average number of hours per working day) = £428.4

Now, as you can see, the numbers can vary depending on how many weeks of work you can reference for the same employee.

2. Breaking Down the New Holiday Pay Formula for workers on variable hours or casual workers on variable rates

Sometimes, employers need to pay their workers at a different rate. For example, a cleaner may earn £10 per hour for cleaning an office on Monday but £12 per hour for cleaning a mill with slighter more risk for their health and safety.

Notice that the below calculation is the long run, working for all possible scenarios.

Step 1: Finding the average weekly income

Gather your employee's pay data for the last 52 weeks of income. Then, take this total amount of income and divide it by 52. This will give you the average weekly pay for the last 52 weeks.

Equation: Total Income/ 52 = Average weekly Income for the last 52 weeks of work

From here, you would use this average weekly income as the amount you would pay your employee for taking a 1-week holiday from work. As discussed above, many holidays won’t last one exact week, so there are a few more steps to determine how much you need to pay per day of leave.

Step 2: Finding the average number of hours worked per week

Now, you will want to find the average weekly working hours to determine how many hours, on average, the employee worked per week on variable hours or zero hours.

Equation: Total number of hours worked during the last 52 weeks/ Total number of working days during the previous 52 weeks = Average number of hours worked per week

Step 3: Finding the average number of days per week

Moreover, you need to find the average number of days worked per week for the last 52 weeks to find how many hours is a working day for your employee. This will be your reference to calculate how many hours of holiday days your employee has taken.

Equation: Number of days worked /52 = Average number of days worked per week

Step 4: Finding the average number of hours worked per day

From steps 3 and 4, you can deduce the average number of hours worked per day by your employee.

Equation: Average number of hours worked per week /Average number of days worked per week = Average number of hours per day

Step 5: Finding your employee’s average hourly rate

You will then divide the employee’s average weekly income by the average number of hours worked per week to find the average hourly pay of your employee.

Equation: Average weekly Income for the last 52 weeks of work / Average number of hours worked per week for the last 52 weeks of work = Average hourly rate

Step 6: Finding your employee holiday pay

This step is the most intuitive as it just multiplies the hourly rate by the number of hours worked per day to get an average daily pay. So, if your employee takes more than one or half a day, just multiply this by their average daily income.

Equation: Average hourly rate x Average number of hours per day x number of days taken

Laying out this formula this way should have provided some help, but numbers may be the best way to demonstrate the new rules. So let’s go over some examples to see the maths in action.

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Are There Exceptions/Edge-Cases With These Rules?

For salaried workers who worked at a fixed rate, for fixed hours, holiday pay will usually be calculated, and their compensation should correspond to the time they would have been paid for while working. However, there are some cases where non-salaried workers are paid monthly, and they will need exceptions like weekly workers. In this case, you will still need to determine their weekly pay, as the new regulations use weeks as their reference period.

This may seem a bit confusing, but the logic here is that months can have variable dates. So if your employee doesn’t work every week, takes days off, or has other disruptions, that month’s average is not an accurate representation of pay. Meanwhile, the regulations dictate that a week will typically last from Sunday to Saturday, so whichever week has pay data will be a reliable representation of pay.

So, in this case, you will have to use an extra formula to determine weekly pay from monthly pay.

Step 1: Gather the data

Calculate how much the employee is paid in a month (say £1250) and how many hours they worked (say 130).

Step 2: Determine hourly pay

Using these numbers, we can determine hourly pay. We divide the £1250 by 130 (£1250 / 130) and determine that the average hourly pay for that month was 9.62.

Step 3: Calculating the weekly pay

Determine how many hours per week this employee worked and multiply that number by the average hourly pay.

You now have weekly pay data to reference for holiday pay and an hourly rate.

What Happens When Workers Don’t Take Holidays?

With the formula for holiday pay being established, you may then ask what happens for those workers who choose not to take a paid holiday. Well, this holiday time (and in turn, holiday pay) is entitled to the worker through these regulations, and therefore they should be paid these hours. However, while workers should always be advised to use their holiday time by their employer, there may be instances where they leave the job before time is taken. In this case, you would follow through with what is referred to as the “payment in lieu.”

You would first determine how much holiday time this worker is owed for their time worked. If they have worked for you for a year, then they are owed 5.6 weeks of holiday pay. For shorter periods, however, you will divide their days worked by the total number of days in the year.

For Example: If they worked 100 days out of 365 total, then 100 / 365 = 0.2739 (or they worked 27.39% of the year).

You then take this decimal and multiply it by 5.6 (the number of holiday weeks owed per year) to calculate the holiday weeks this employer should receive. In this case, 0.2739 x 5.6 = 1.53, so that is how many weeks of holiday pay this employee is owed.

After determining how much holiday pay they are owed, you will follow the process we outlined earlier and decide on their average weekly salary. You then multiply this average weekly pay by the holiday time they are entitled to, and you can determine how much this worker will be owed for their holiday time accrued.

Regulations Should Always Evolve with the Workforce

These new regulations may have made the holiday pay process a bit more complex for employers. Still, as a step to ensure fairer employee pay, employers need to understand. It is also important to note that this information shared will not apply to every situation, as some employers may have even more unique employee situations than the ones mentioned here, with contracts offering more holiday time or different stipulations. In that case, further independent legal advice should be considered.

The complete regulations webpage offers more examples, so if you need more time to get acquainted with the process, you should visit the page.

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