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Pay-as-you-go annual holiday payments
Some employees may be paid their annual holiday entitlement on a pay-as-you-go basis.
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If an employee works so intermittently or irregularly that it is impractical for the employer to provide the employee with 4 week or is hired on a contract of less than 12 months, then the employee can agree with their employer to be paid holiday ‘ ’.
In this situation, 8% of the employee’s total earnings will be paid as holiday pay along with their regular pay each pay day. The 8% is based on the total earnings in each pay period.
In limited circumstances, some employees may be paid holiday pay at the rate of not less than 8% of their gross pay with their regular pay instead of being provided with 4 week 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 week annual holidays.
In both of these situations:
- the employee must agree to it in their
- the 8% gross earnings must be shown as an identifiable component of the employee’s pay.
Creating an employment agreement
If annual holidays are paid with regular pay and do not meet the above requirements, then the employee remains entitled to 4 week paid annual holidays in addition to the ‘holiday’ payment they have already received.
Pay-as-you-go annual holiday payments calculation
The formula for calculating gross earnings with holiday pay is:
- Gross earnings (excluding holiday pay) = number of hours x hourly rate (plus any other required payments such as allowances and, incentive payments).
- Holiday pay = gross earnings (excluding holiday pay) x 0.08.
- Total gross earnings including holiday pay = gross earnings + holiday pay.
Example:
- If an employee works 15 hours a week at an hourly rate of $25, 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 $25 = $375). Their weekly gross earnings excluding holiday pay will be $375.
- To calculate the holiday pay you need to multiply the gross earnings by 8% ($375 x 0.08 = $30). The holiday pay will be $30.
- Their total gross earnings for the week, including the 8% holiday pay, would be the gross earnings plus the holiday pay ($375 + $30 = $405). The total gross earnings including holiday pay will be $405.
Irregular or changing work patterns
An employer should not assume that just because an employee is employed on a ‘ ' 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-terms 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 is not possible or practicable to provide a 4 week 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, (for example, 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 4 week annual holidays to be provided after 12 months of 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 cannot be deducted.
Our Holidays Act 2003 guides provide information about leave and holidays entitlements and pay.
Our shorter guide is for employees and employers to help them understand minimum employment entitlements:
Leave and holidays: A guide to employees’ legal entitlements (PDF, 2.1 MB)
Our longer guide gives detailed, practical guidance for payroll providers and professionals:
Holidays Act 2003 guidance (PDF, 1.8 MB)