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.
If an employee is employed on a genuine fixed-term agreement for less than 12 months, they can agree that they will get 8% added to their gross weekly earnings (pay-as-you-go) instead of taking annual holidays or getting paid out all of the 8% at the end of their term.
This must be included in their employment agreement, and the 8% must be shown as an identifiable amount in holiday and leave records (it is considered best practice to show this on the employee’s pay slip). At the end of the fixed-term, the employee will have received all their pay for annual holidays and won’t get any additional payments or holidays. This reflects the fact that these employees are not expected to reach the date on which they qualify for annual holidays (ie 12 months).
If an employee is employed on one or more further genuine fixed-term agreements of less than 12 months in total with the same employer, the same arrangement for pay-as-you-go holiday pay can be made, even when there is no break in employment. This can only be done if the employer and employee agree in writing and there is a genuine reason for another fixed-term agreement.
If an employee starts off on a fixed-term agreement of less than 12 months with 8% added on to their gross weekly earnings and then later they get a permanent job with the same employer, the payment of the additional 8% annual holiday pay in the employee’s regular pay must stop.
The employee will become entitled to four weeks’ annual holidays one year after the final fixed-term period started, but because the employer has already paid the additional 8% annual holiday pay during the fixed-term period of employment, the pay for annual holidays is reduced by the amount already paid.
If an employer incorrectly pays annual holiday pay on a pay-as-you-go basis eg:
- the employment agreement is for 12 months or more or
- it is not a genuine fixed-term employment agreement (eg there isn’t a genuine reason for the fixed-term or this isn’t recorded in the employment agreement) or
- the payment of holiday pay on a pay-as-you-go basis isn’t agreed and recorded in the employment agreement or
- the 8% payment is not shown as an identifiable amount in pay records
the employee will still become entitled to four weeks’ paid annual holidays after 12 months of employment, and any amount paid on a pay-as-you-go basis can’t be deducted from the employee’s annual holiday pay.
When fixed-term agreements are linked to targets like project completion, there can be a risk to the employer that the fixed-term will last 12 months or longer, and then the employee will become entitled to paid annual holidays, despite having already been paid on a pay-as-you-go basis.
Therefore, pay-as-you-go arrangements are not recommended where it is possible that the employment will last 12 months or more.
The employer and employee should try to clarify entitlements and renegotiate the relevant employment agreement as soon as it appears likely that a fixed-term arrangement will unexpectedly last more than 12 months.
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.