How to calculate holiday pay (Part 2)
Everyone seems to find holiday pay calculations particularly complicated and confusing. So we've written a series of articles to try to clarify matters a bit by explaining some of the underlying maths.
But what about part years and variable hours?
So, from the previous episode we know that there is a statutory minimum holiday entitlement of 5.6 weeks.
But things become more tricky when people are employed on an hourly contract, particularly if their time worked varies on a daily or weekly basis.
In that case, which weeks do you use for the 5.6 weeks calculation?
If they worked a regular alternating shift pattern you could calculate the weekly average and use that.
But what if they have completely random variable hours? How do you then calculate holidays?
This is where the concept of holiday accrual rate becomes useful.
But I just use the magical YouGov calculator
Ah yes, the magical YouGov holiday entitlement calculator is certainly very useful.
But have you ever wondered how it actually works?
You know one day someone will inevitably ask you how the calculation has actually been done!
Turns out the YouGov calculator makes use of the 12.07% holiday accrual rate.
What is meant by the 12.07% holiday accrual rate?
You can think of holiday as being 'earned' (ie accrued) through time spent at work, in a similar way to wages.
So if you're on the statutory minimum holiday entitlement, by working for a year you will accrue 5.6 weeks of holiday
Which means that whilst you might earn £7.83 of wages for every hour spent at work, in this case you would also accrue 0.1207 of an hour (7.302 minutes) of holiday.
See that 0.1207? It's known as the 'holiday accrual rate'.
0.1207 = 12.07/100 = 12.07%
Why is the 12.07% holiday accrual rate useful?
Once you know this 'holiday accrual rate' it's really easy to work out how much holiday is accrued for a given amount of time spent working.
Just multiply the time worked by the holiday accrual rate to give the amount of holiday accrued. It's as simple as that. No pro-rata calculations required.
And the neat thing is that it doesn't matter what units (ie hours, days, months) you use to express the time worked, the holiday just comes out in the same units.
It turns out (more on this later) that a holiday accrual rate of 12.07% is typically taken to be equivalent to the statutory minimum holiday entitlement of 5.6 weeks including bank holidays (= 28 days for full-time 5-day week workers).
So, work for an hour, and you accrue 1 x 12.07/100 = 0.1207 hours (= 7.302 minutes) of holiday
Work for a day, you accrue 1 x 12.07/100 = 0.1207 days (= 0.9656 hours = 57.936 minutes, for an 8 hour day) of holiday
Work for a week, you accrue 1 x 12.07/100 = 0.1207 weeks (= 0.6035 days = 4.828 hours = 289.68 minutes, for an 8 hour day 5-day week) of holiday
You can see that this works irrespective of units by considering a day of work in terms of hours:
Work for 8 hours, you accrue 8 x 12.07/100 = 0.9656 hours (= 57.936 minutes) of holiday
See, that's the same result as when it was calculated in terms of days (see above).
How do I use the 12.07% holiday accrual rate?
So, now it's really straightforward to calculate the holiday accrued by your variable hour workers each week. Just multiply the hours worked that week from their timesheet by the accrual rate, to give the number of hours holiday accrued that week. And if you manage timesheets in Excel, you can just write yourself a formula (=HoursWorked*0.1207) to do this automatically.
And it's also really easy to work out the holiday entitlement for fixed-length-day employees who start or leave part way through the year. Just multiply the number of days they've actually worked (ie not holidays, weekends, or unscheduled days) during this period by the accrual rate, to give the number of days of holiday they've accrued. And it doesn't matter whether they're full-time or part-time, the calculation is the same. Or do the calculation using hours worked if you prefer, you'll just get the holiday in hours rather than days.
And in the 'worse case scenario' of an employee who both starts and ends part way through the year, and has irregular length days, or does a different number of hours each week, simply add up all the hours they've worked during this period from their timesheets and then multiply that by the accrual rate to give the number of hours of holiday that they've accrued.
But where does the 12.07% holiday accrual rate actually come from? (Weeks)
So, those of you responsible for calculating holiday pay probably already know how awesomely convenient the 12.07% holiday accrual rate is and use it all the time, particularly when dealing with hourly paid staff.
But have you ever wondered where that magical figure of 12.07% actually comes from?
You might assume that a number which such specific decimal places must come from somewhere complicated, but despite the non-roundness it's surprisingly straightforward.
To work out how much holiday is accrued for every hour worked, all you need to do divide the full-time holiday entitlement by the amount of time worked by full-time employees.
Let's assume there are 52 weeks in a year. (Yes, I know that's not strictly true, more on this later)
And let's assume that an employee is entitled to holiday of 5.6 weeks (including bank holidays), in line with the statutory minimum.
Now, employees only accrue holiday when they're actually working. They don't accrue holiday when they're on holiday.
So, the number of weeks that they're accruing holiday for is the number of weeks in a year minus the number of weeks spent on holiday.
Weeks spent working = 52 - 5.6 = 46.4
So, that means the 5.6 weeks of holiday are accrued over 46.4 (= 52 - 5.6) weeks at work.
Which means that 5.6 / 46.4 = 0.1206896 holiday weeks are accrued for every week worked
Thinking of this decimal as a percentage gives 12.07% (rounded to two decimal places), which is your magical accrual rate.
But where does the 12.07% holiday accrual rate actually come from? (Days)
Alternatively, you could work it out in days if you prefer.
For a 5 day week, 5.6 weeks of holiday is equivalent to 28 days.
And a 52 week year has 52 x 5 = 260 week days
Which means there are 260 - 28 = 232 working days
Which means that 28 / 232 = 0.1206896 holiday days are accrued for every day worked
Thinking of this decimal as a percentage gives 12.07% (rounded to two decimal places), which once again is your magical 12.07% holiday accrual rate.