Guest Post from paiyroll®
From April 2020, the law regarding Holiday Pay for workers who do not have fixed hours or pay changed. This must now be calculated using a “52-week reference period”. Unpaid weeks must not be included. Previously, there were two methods used for holiday pay:
- Pay 12.07% of pay as rolled-up holiday pay
- Calculate the average pay over 12 weeks
Unfortunately, neither of these two methods complies with the new law. Rolled-up holiday pay is now unlawful – so if you’re using rolled-up holiday pay you need to stop immediately.
The new holiday pay law
UK employment law means that all workers are entitled to 5.6 weeks of paid holiday per year.
The first change is that a 52-week reference period must be used (not 12). The 52 weeks used for the calculation, can only be “paid weeks” i.e., any unpaid weeks where the worker was not paid, must be ignored.
A welcome change is that employers are not required to look back further than 104 weeks (2 years). However, because of the requirement to use 52 paid weeks, it will not be possible to only use 1 year of weekly pay history – as you will need to disregard unpaid weeks and look back further.
If the employer maintains 104 weeks of historical pay data and is unable to find 52 paid weeks, then the maximum number of paid weeks can be used. For example, if you only paid the worker in 40 weeks of the last 104, then it is sufficient to use these weeks.
Importantly, the pay data used must be weekly data. You cannot use 2-weekly, 4-weekly or monthly pay. If workers receive pay other than weekly, then it will be necessary to maintain records of the pay and hours for each week to do the weekly calculation. This data is different from the payroll data!
How to calculate holiday pay?
While it sounds simple, the calculation is difficult to do in practice because it is a rolling calculation and therefore changes every week. Here are the steps involved:
- Maintain a detailed record of 104 weeks of weekly pay data for each worker – when they were paid (date, amount).
- Every time holiday is booked, a new weekly average must be calculated using 52 paid weeks (disregarding the unpaid weeks) looking back up to 104 weeks.
- Only use the elements of pay that should be included for holiday pay.
- The pay history must be detailed enough to be computed per week.
- Once you have a weekly average, you will need to convert the weekly amount to the number of days taken as holidays (workers don’t often take multiples of weeks!).
Can I do this in Excel?
Probably not as you will need some programming skills. It is difficult because of the need to ignore unpaid weeks and only use 52 weeks of paid data. It is not a fixed calculation across 52 or 104 cells. An excel sheet would need to be updated each week with new pay data for every worker where the older data was removed. Furthermore, 2 payments which fall in the same week must be added together and used in a single week amount. The rolling nature of the calculation would make it extremely time-consuming.
Automated holiday pay
The only practical way to implement the new legislation is to identify payroll software which can automate this task. Holiday pay then becomes another calculation in payroll and is automated in the same way as PAYE, NIC or Auto-enrolment. paiyroll® can fully configure the system for your holiday pay requirements. The holiday payroll solution works as follows:
- Ideally, you provide 104 weeks of historical pay data so paiyroll® can import that as a starting point. If you don’t have this, then don’t worry the system will still work.
- paiyroll® can configure everything for you:
- Advise and agree with you on the elements of Pay Items that need to be included in the holiday pay calculation – every client is different, and the software supports this. paiyroll® can also configure the definition of a week e.g., Saturday to Sunday or the days that align with your pattern. paiyroll® can also configure different holiday schemes for different types of workers.
- Use the same holiday reset date for all workers (company-wide) or based on the workers' anniversary date.
- Specify which days are Bookable days (which days count as booked holidays) per week e.g., Mon-Fri or 7-days per week etc.
- Advise if Holiday Pay-out is to be paid on Leaving, at holiday year-end or not as per your employment contracts.
- Since you will likely be starting mid-year, a spreadsheet of holidays taken to date, ensures everyone starts with their correct balance.
- Regardless of whether you pay monthly, weekly, 2 or 4-weekly, the payroll software records precise weekly data. That means going forward you will need to provide dates along with pay for each week or each date.
- Workers request a holiday using the paiyroll® app and Holiday pay is estimated and displayed before and after booking. Accrued holidays and days taken are displayed.
- Managers approve holidays as they are notified of any requests in My tasks. All holiday information is visible, and they can approve or deny holidays. if not approved, the reason can be entered and sent back to the worker.
- Immediately upon approval, holiday pay is automatically added to the payroll and Workers can view their Live payslips – this is because the software automatically calculates holiday pay in the next pay run according to the rules. Workers can view their Live payslip anytime 24×7 to see holiday pay and all related deductions. Statutory weekly and daily pay is recorded on the payslip.
paiyroll® is a cloud-based automated payroll software powered by artificial intelligence. By automating 80+ payroll tasks paiyroll® can save you 75% of your time and cut costs by 50%.
At Silver Cloud HR, we pride ourselves on keeping up with current legislation and ensuring our customers remain compliant. Holiday pay has been particularly tricky because the complexity entails a huge amount of manual work. We are very pleased to have teamed up with paiyroll® who provide a fully automated solution for our clients and insures you are 100% compliant!
In the ever changing world of work where more employees are working remotely and flexible working has become a legal right, employers can expect access to a wider pool of talent.
Flexible, annualised, compressed & part time hours makes it as important as ever for employers to have trust & confidence in their payroll supplier to provide accurate detailed payslips with minimum effort. This is where Silver Cloud HR can help, working with the whole of market we can identify what is right for your particular requirements.