In limited circumstances some employees may be paid holiday pay at the rate of not less than 8% of their gross earnings with their regular pay instead of being provided with 4 weeks’ annual holidays each year.
This can only be done if:
- the employee is employed on a genuine fixed-term agreement of less than 12 months, or
- the employee works so intermittently or irregularly that it is impractical for the employer to provide them with 4 weeks’ annual holidays.
In both of these situations:
- the employee must agree to it in their employment agreement and
- the 8% gross earnings must be shown as an identifiable component of the employee’s pay.
If annual holidays are paid with regular pay and do not meet the above requirements then the employee remains entitled to 4 weeks’ paid annual holidays in addition to the ‘holiday’ payment they have already received.
Calculating total gross earnings including holiday pay
The formula for calculating gross earnings with holiday pay is:
- Gross earnings (excluding holiday pay) = number of hours x hourly rate.
- Holiday pay = gross earnings (excluding holiday pay) x 0.08.
- Total gross earnings including holiday pay = gross earnings + holiday pay.
- If an employee works 15 hours a week at an hourly rate of $20, first you must calculate their gross earnings excluding holiday pay. You can do this by multiplying the number of hours worked by the hourly rate (15 x $20 = $300). Their weekly gross earnings excluding holiday pay will be $300.
- To calculate the holiday pay you need to multiply the gross earnings by 8% ($300 x 0.08 = $24). The holiday pay will be $24.
- Their total gross earnings for the week, including the 8% holiday pay, would be the gross earnings plus the holiday pay ($300 + $24 = $324). The total gross earnings including holiday pay will be $324.
Irregular or changing work patterns
Don’t assume that just because an employee is employed on a ‘casual’ employment agreement they will automatically qualify for annual holiday pay on a pay-as-you-go basis. It is the employee’s work pattern that qualifies them for pay-as-you-go annual holiday pay, rather than their employment agreement type (apart from fixed-term agreements of less than 12 months). To be paid holiday pay on a pay-as-you-go basis, the employee’s work pattern must be so intermittent or irregular that it isn’t possible or practicable to provide 4 weeks’ paid annual holiday.
In addition this can only be done if:
- the employee agrees to it in their employment agreement, and
- the annual holiday pay is shown as an identifiable part of the employee’s pay, (e.g. in holiday and leave records. It is considered best practice to show this on the employee’s payslip).
In this situation the employer should regularly review the employee’s work pattern to see if a regular pattern of work has developed.
If it has, the employer and employee should enter into a new employment agreement that provides for four weeks’ annual holidays to be provided after 12 months further employment, and that removes the 8% payment.
If a regular pattern of work has developed but the employer continues to pay the 8% annual holiday pay for 12 months or more, then the employee will become entitled to paid annual holidays, and any amount already paid on a pay-as-you-go basis can’t be deducted.