Holiday entitlement: What small business owners need to know

Understanding staff holiday entitlement is just as important as scheduling the time for your employees to come into work. The rules for employee holiday rights can get complicated as your staff numbers increase and work schedules vary from full time to part time.

Then there are rules you need to follow, such as how to calculate holiday pay pro rata and deal with increases in statutory leave.

It can be tricky to manage staff holidays alongside all the other requirements of running a small business – but it’s not impossible. To help you, here’s a guide to the basics of holiday entitlement.

This article covers the core concepts and definitions you need to know about, how to calculate holiday pay, calculating leave entitlement, and holiday pay entitlement for part-time employees. And it will be really useful for when you’re using your payroll software to manage your payroll.

The basics of holiday entitlement

Generally, most workers under an employee contract who work a five-day week must receive at least 28 days’ paid annual leave per year. Part-time staff or those who work fewer than five days a week are entitled to 5.6 weeks of holiday, which works out to be fewer than 28 days per year.

As an employer, you can choose to offer more leave than the legal minimum and you don’t have to apply all the rules that apply to statutory leave to the extra leave.

Virgin and Netflix, for example, are two companies that offer unlimited holidays to their employees.

For your business, you might require staff to be employed for a certain amount of time before they become entitled to statutory leave. You can also choose to include bank holidays as part of it.

Employees have the right to:

• Get paid for time off
• Accrue holiday entitlement through maternity, paternity, adoption, and sick leave.

Calculating holiday entitlement

The start and end dates within the statutory leave year are typically communicated by the employer as soon as the staff contract starts.

It might be easiest to keep your leave year the same as the calendar year, from 1 January to 31 December, but there are some companies and organisations that run this from 1 September to 31 August, for example. Your staff’s leave availability is applicable during this window. Note, the holiday calendar could vary depending on the industry your business is in.

If an employee starts their job part-way through a leave year, they’re only entitled to part of their total annual leave for the current leave year.

What they get depends on how much of the year is left.

You can use an accrual system to work out an employee’s leave. Under this system, employees get one-twelfth of their leave each month. So by the third month, they’d be entitled to a quarter of their total leave – for example, seven days out of 28 for a five-day week.

Gov.uk features a handy calculator for full-time staff, part-time staff and employees who work irregular hours, covering shifts or casual work.

An example of a casual worker is someone who:

• Occasionally does work for your business
• Doesn’t have to accept all the work you offer and work when it’s convenient for them
• Works freelance, zero hours, or as required.

The employee contract should detail how many days’ leave your staff can carry over into the next year – meaning how many days they can add on to the following leave year if they didn’t use all of their accrued days.

So, for example, if your employees get 28 days’ leave, you might stipulate in their contract that they can carry over up to a maximum of eight days.

Employers must allow staff to carry over a maximum of 20 of their 28 days’ leave entitlement if they could not take annual leave because they were off sick.

Read more about payroll

• Payroll year end checklist: Here’s what your business needs to do
• 5 simple tips to get payroll right every time
• An ultimate guide to payroll for your small business

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The basic concepts of holiday pay

Employees are entitled to a week’s pay for each week of leave they take. A week’s pay is based on the number of hours someone works during the week and how they’re paid for the hours they work. For example:

• If an employee is salaried, a week’s holiday pay would equal how much they get for a week’s work
• If an employee works a set shift and is paid hourly, a week’s holiday pay equals the average number of weekly fixed hours worked in the previous 12 weeks at their average hourly rate
• If the employee is a temporary or casual worker with no shift hours, a week’s holiday pay is their average pay over the previous 12 weeks in which they were paid

When calculating the average hourly rate, only count the hours worked and how much the employee was paid. Take the average rate over the past 12 weeks. If no pay was paid in a particular week, count back a week further so the rate is based on 12 weeks in which the employee was paid.

The Advisory, Conciliation and Arbitration Service (Acas) website has an automated online tool to address questions about specific employee classifications and scenarios.

Best practices for booking time off

In general, notice for taking leave is at least twice as long as the amount of leave an employee wants to take. For example, two days’ notice for one day’s leave.

You can create your own protocol in your employees’ contracts but you can’t refuse to let employees take leave.

You can refuse a leave request, but employer courtesy calls for as much notice in refusing the request as the amount of leave requested. For example, two weeks’ notice for a leave request of two weeks.

Small business HR software supports this process by allowing team members to request holiday, and managers can then review and approve or reject that request.

Your employees may also request a part-leave day. For example, if they’re working on a part-time basis or have a half day’s leave to take. As the employer, it’s up to you as to how to address these types of requests in the employee contract.

Managing leave time during an employee’s notice period

If one of your employees is leaving your business to work at a different company, they may have some remaining holiday entitlement.

During their notice period, employees can take whatever is left of their statutory annual leave. How much they get depends on how much of the leave year has passed.

Alternatively, they could potentially negotiate receiving their remaining leave in the form of a payment.

If an employee has taken more leave than they’re entitled to, you can’t deduct the balance from their final pay unless it’s been agreed beforehand in writing. The rules in this situation should be outlined in the employment contract upon hire, and in your employee guidelines.