Working out what an employee gets paid for taking a day off on annual holidays will depend in part, on what they have earned in the previous 12 months.
Calculating rate of payment an employee is entitled to
For an employee who takes all or part of their annual holiday entitlement, the annual holidays are paid at the rate of at least the greater amount of:
- ordinary weekly pay (OWP) as at the beginning of the annual holiday, or
- the employee’s average weekly earnings (AWE) for the 12 months immediately before the end of the last pay period before the annual holiday.
Both of these calculations need to be done every time the employee takes annual holidays. They apply to all employees taking entitled annual holidays. If an employee takes a period of annual holidays that covers more than one pay period, even if the employee has agreed to be paid for the annual holidays as part of their normal pay cycle, the calculation for the entire time on annual holidays is still done at the start of the annual holiday, rather than being done each pay period. However, if the holiday pay is recalculated during the holiday (as some payroll systems do) and the amount received is greater than would have been received if the calculation was just performed at the start of the annual holiday, this is still compliant. If it is less, it isn’t.
Annual holidays are paid at the rate of the greater of ordinary weekly pay and average weekly earnings.
Ordinary Weekly Pay vs Average Weekly Earnings (OWP vs AWE)?
Payment rate for annual holidays when employee has no entitlement
There may be times when an employee has no entitlement to annual holidays but employers need to calculate annual holiday payments. This can happen in three situations:
- The employer agrees that the employee can take annual holidays in advance. For annual holidays taken in advance, the employee gets paid the greater of:
- their ordinary weekly pay at the beginning of the annual holiday, or
- their average weekly earnings:
- for the 12 months just before the end of the last pay period before the annual holiday, or
- for the total time they have worked for the employer (if the employee has worked for the employer for less than 12 months) ending at the last pay period before the annual holiday. In this situation the employee’s average weekly earnings is calculated by taking their gross earnings for the total time they have worked for their employer and dividing this by the number of whole or part weeks they have worked for the employer, (rather than dividing it by 52).
- The employer has a regular annual closedown of their workplace and the employee is either in the first 12 months of their employment or has taken all their annual holidays in advance.
- The employee’s employment ends and the employer must calculate holiday pay for the time worked since the employee’s last anniversary date.
Impact of parental leave on payment rate
If the employee has unused annual holidays that they were already entitled to before going on parental leave, then the normal calculation for annual holidays will apply to those holidays regardless of when they are taken, they are paid at the greater of ordinary weekly pay or average weekly earnings at the time they take the annual holidays.
If the employee becomes entitled to annual holidays:
- during parental leave or
- in the next 12 months after their return from parental leave,
the pay for those annual holidays is calculated at the rate of the employee’s average weekly earnings over the 12 months just before the end of the last pay period before the annual holiday is taken (with no comparison to ordinary weekly pay).
An employer can always choose to pay these annual holidays using the greater of ordinary weekly pay or average weekly earnings.
It’s important that the employer and employee discuss parental leave plans as early as possible to make sure they have a shared understanding of their rights and responsibilities to each other. , including where to find out further information or assistance. Their discussion should include the employee’s current entitled annual holidays’ balance, their anniversary date for annual holiday and the effect of parental leave on payment for annual holidays.