Holiday Pay after a Pay Rise

Didn't find your answer?

I am reviewing the holiday pay calculations at my workplace. I know this can be a difficult area so want to ensure we are calculating everything correctly.

If a worker has no fixed hours, the ACAS guidance here says that holiday pay will be based on the average pay they got over the previous 52 weeks.

If the worker recieved a pay rise from the start of this pay period, and takes a day off, their holiday pay will therefore be at a lower rate than their worked hours. It will remain lower for 1 year until the 52-week average eventually "catches up" to their new rate.

This seems to contradict the ACAS guidance on the same page, which states that "When an employee or worker takes holiday, they should get the same pay when they're on holiday as when they're at work – whatever their working pattern."

I therefore have a few questions:

1) How do we marry up the apparant contradiction between these 2 lines of guidance? Are we obliged to inflate the 52-week calculation to match the increase in pay, or are we legally entitled to pay holiday at a seemingly lower rate?

2) If the pay rise was a result of an increase in the national minimum/living wage, do we have to increase the calculated 52-week based holiday pay to comply with minimum wage requirements?

3) If the worker does not have a fixed number of days worked per week, how should we go about converting from the weekly calculation to a day's holiday pay?

Help would be most appreciated!

Replies (14)

Please login or register to join the discussion.

avatar
By Hugo Fair
01st Jun 2023 12:34

You could do worse than have a read of https://www.accountingweb.co.uk/tax/business-tax/payroll-and-holiday-pay... and then watching the podcast to which it refers.

But, until the current Consultation is concluded and we know what radical changes are proposed, we are stuck with the current mess ... where 'mess' = the rules are clear but complex, and the results are often unfair!

With the caveat that all holiday pay rules determine the *min* to be paid (there's nothing to stop you paying more) ...

1. You are NOT obliged to inflate the 52-week calculation to match the increase in pay.
2. You do NOT have to increase the calculated 52-week based holiday pay to comply with minimum wage requirements.
3. Up to you (so long as you apply consistent rules that ideally are laid out in your employment contracts).
The rules only state the amount of paid holiday (5.6 weeks pa) and the way in which to calculate a week's (average) pay.

All of my comments are gross simplifications within a wide-ranging and complex area - for specific advice you need to appoint a professional advisor.

Thanks (3)
Replying to Hugo Fair:
avatar
By Yeadonian
01st Jun 2023 14:13

Thanks Hugo.

https://www.tuc.org.uk/guidance/what-rate-should-my-holiday-pay-be-set

On point 2, the TUC guidance says "Whatever your contract says, your employer must always pay at least the National Minimum Wage for your holiday.".

Do you think they are technically wrong on that point?

Thanks (0)
Replying to Yeadonian:
RLI
By lionofludesch
01st Jun 2023 17:45

Depends what they mean by that ambiguous statement.

Thanks (0)
Replying to Yeadonian:
avatar
By Hugo Fair
01st Jun 2023 18:43

Well they have a vested interest in, shall we say, keeping it ambiguous.

Without spending time on this lovely evening in searching the legislation ... I'm 99.9% certain of my memory when that exact question came up fairly recently at a public workshop with HMRC and various experts (CIPP, etc):

"Think about it. NMW/NLW are min rates for hours *worked*. For the purposes of doing these calcs there are definitions of activities that count as 'work hours' - and, although some of those may surprise you, they do NOT include paid holiday (during which by definition the employee is not working)."

Thanks (3)
Replying to Hugo Fair:
avatar
By Yeadonian
02nd Jun 2023 08:57

https://www.gov.uk/hmrc-internal-manuals/national-minimum-wage-manual/nm...

This would seem to agree with your position, which makes sense to me.

Thanks for your help.

Thanks (0)
Replying to Hugo Fair:
avatar
By The Rogue
08th Jun 2023 12:00

So could an employer pay holiday pay of 1p per hour?

To expand: could an unscrupulous employer write this into the contract and get away with it under current minimum wage rules?

Thanks (0)
Replying to The Rogue:
avatar
By Yeadonian
08th Jun 2023 12:47

No, as I understand it they would still have to pay at least the average pay over the last 52 weeks.

It's not a minimum wage issue, but a minimum holiday pay issue, which is a different thing.

A contractual term can't override a legal requirement.

Thanks (1)
Replying to The Rogue:
avatar
By Jem Cattle
08th Jun 2023 12:50

How would that meet statutory holiday pay requirements?

Thanks (1)
Replying to The Rogue:
avatar
By Hugo Fair
08th Jun 2023 15:18

I presume this is a wind-up that references my comment posted to an article at https://www.accountingweb.co.uk/tax/business-tax/payroll-and-holiday-pay... ?

But if so, you've misunderstood (whether or not deliberately per your alias) what I said there ... which was about a possible mechanism to *legally* reduce the rate of holiday pay to what any sane person would feel was reasonable - and NOT a way of subverting the fair amount of holiday pay (per comments of others).

Thanks (3)
Replying to Hugo Fair:
avatar
By The Rogue
08th Jun 2023 15:40

No wind up intended but certainly tongue in cheek. My mind just went down the "possibility that holiday pay can be below minimum wage" rabbit hole and ended up in the "some employers would try to get away with it if they could" warren.

Oh, and I would like to change my alias to my real name but last time I tried it couldn't be done so I am stuck with it.

Thanks (1)
John Hextall
By John Hextall
12th Jun 2023 10:34

I'd keep the hours worked separate from the rate paid. Calculate the average hours worked over the last 52 weeks and pay holiday based on that at the current rate of pay. It's a lot easier for an employee to be disgruntled about the rate of pay being wrong than about the average hours worked over the last year.

Thanks (0)
Replying to John Hextall:
avatar
By Hugo Fair
12th Jun 2023 11:19

Logical, possibly even sensible/pragmatic, but *entirely* incompatible with the (current) legislation and case law.

Thanks (2)
avatar
By [email protected]
18th Apr 2024 18:09

I work in education our accounts run from 1:7/23-30/6/23

We have just issued a pay increase wef 15/4/23 - will it change their holiday hour. All staff are on fixed hours per week

Thanks (0)
Replying to [email protected]:
avatar
By FactChecker
18th Apr 2024 21:58

Are there any typos in there - or do you really mean to ask about a pay award that's apparently being applied retrospectively?

In my past, the Education sector was infamous for taking so long to negotiate national rates that awards were often retrospective (and a nightmare to apply - particularly where a member of staff had left or varied their hours or ...).
BUT that hasn't been the case for many years AND never for over a year in arrears.

Anyway I'm having difficulty understanding exactly what you've written ... but, for the avoidance of doubt, unless there are specific terms in the Employment Contracts to prevent this then, yes, a retrospective pay award will require any pay-related items (pay, overtime, holiday pay, SMP, etc) to be re-calculated for each of the affected months!

Thanks (2)