Everyone
Pay-as-you-go annual holiday payments
Some employees may be paid their annual holiday entitlement on a pay-as-you-go basis.
If an employee works so intermittently or irregularly that it is impractical for the employer to provide the employee with 4 week Paid time away from work for rest and recreation. Employment that ends on a specified date or when a particular event occurs, for example, covering for parental leave or seasonal work like fruit-picking. Payment for annual holidays at the rate of not less than 8% of the employee’s gross earnings, which is paid with their regular pay instead of getting 4 weeks’ paid annual holidays each year. Some casual and fixed-term employees may get pay-as-you-go holiday pay by agreement.
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
employment agreement A written document setting out the terms and conditions of employment agreed by the employer and employee (also known as a ‘contract of service’). It can include other contractual documents and agreements made by the employer and employee. Every employee must have a written employment agreement.
- 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.
If an employee is employed on a genuine fixed-term agreement for less than 12 months, they can agree that they will get 8% added to their gross weekly earnings (pay-as-you-go) instead of taking annual holidays or getting paid out all of the 8% at the end of their term.
This must be included in their employment agreement, and the 8% must be shown as an identifiable amount in holiday and leave records (it is considered best practice to show this on the employee’s pay slip). At the end of the fixed-term, the employee will have received all their pay for annual holidays and will not get any additional payments or holidays. This reflects the fact that these employees are not expected to reach the date on which they qualify for annual holidays (that is 12 months).
If an employee is employed on one or more further genuine fixed-term agreements of less than 12 months in total with the same employer, the same arrangement for pay-as-you-go holiday pay can be made, even when there is no break in employment. This can only be done if the employer and employee agree in writing and there is a genuine reason for another fixed-term agreement.
If an employee starts on a fixed-term agreement of less than 12 months with 8% added on to their gross weekly earnings and then later they get a permanent job with the same employer, the payment of the additional 8% annual holiday pay in the employee’s regular pay must stop.
The employee will become entitled to 4 weeks annual holidays one year after the final fixed-term period started, but because the employer has already paid the additional 8% annual holiday pay during the fixed-term period of employment, the pay for annual holidays is reduced by the amount already paid.
If an employer incorrectly pays annual holiday pay on a pay-as-you-go basis, for example:
- the employment agreement is for 12 months or more, or
- it is not a genuine fixed-term employment agreement (for example, there is no genuine reason for the fixed-term, or this is not recorded in the employment agreement), or
- the payment of holiday pay on a pay-as-you-go basis is not agreed and recorded in the employment agreement, or
- the 8% payment is not shown as an identifiable amount in pay records, then
the employee will still become entitled to 4-week paid annual holidays after 12 months of employment, and any amount paid on a pay-as-you-go basis cannot be deducted from the employee’s annual holiday pay.
When fixed-term agreements are linked to targets like project completion, there can be a risk to the employer that the fixed-term will last 12 months or longer, and then the employee will become entitled to paid annual holidays, despite having already been paid on a pay-as-you-go basis.
Therefore, pay-as-you-go arrangements are not recommended where the employment may last 12 months or more.
The employer and employee should try to clarify entitlements and renegotiate the relevant employment agreement as soon as it appears likely that a fixed-term arrangement will unexpectedly last more than 12 months.
Irregular or changing work patterns
An employer should not assume that just because an employee is employed on a ‘ Not defined in employment law, but usually refers to a situation where an employee works on an as-and-when-required basis and has no guaranteed hours of work, no regular pattern of work, and no ongoing expectation of employment.
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)(external link)
Our longer guide gives detailed, practical guidance for payroll providers and professionals:
Holidays Act 2003 guidance (PDF, 1.8 MB)(external link)