Avoiding holiday pay headaches this summer

Hello to the holiday season. Easter and the Coronation are behind us but a further bank holiday looms in coming weeks, alongside the hottest months of the year, when a lot of employees chose to take their annual leave.

Everyone, including payroll and accountancy professionals, love to take a break. But unfortunately holiday pay is often one of the most time-consuming and headache-inducing parts of running a business’ books.

Here’s a guide to avoiding the biggest headaches in this vexed area.

Design a policy that suits an individual business

Almost every worker in the UK is guaranteed 5.6 weeks of annual leave. For regular full time workers (five days a week) that comes out to 28 paid days off. Things are a bit more complex when it comes to part time workers – more on that in the 52-week averaging section below.

This 28 days can include bank holidays. Usually there are eight of these a year, meaning full time employees get four weeks of annual leave they can use flexibly alongside eight days off that everyone takes.

Businesses are not legally obligated to give bank holidays off, and indeed many still operate on bank holidays, particularly in the hospitality, tourism, and retail sectors, when long weekends can be very busy. But if businesses don’t, employees will need to be given 5.6 weeks off – and given much of the business sector pauses on bank holidays, it often makes sense to align with the rest of the economy and down tools on those days too. Sometimes a mix makes sense, with holidays given on Christmas but not Easter, for example.

Many businesses explicitly break out bank holiday leave from other leave, guaranteeing in contracts 20 annual leave days alongside the bank holidays. Some give more leave days on top of this minimum, with 25 days (five weeks) plus bank holidays in many roles. If your clients come to your for advice, they can check what competitors are doing in their space by looking at their job listings. If their leave policy is dramatically more generous than your clients’, they could find themselves losing employees to them.

Extra annual leave on top of the legal minimum can be treated differently – perhaps only being granted after a certain amount of time at a company. This lets it work as both a recruitment lure and a retention bonus.

One thing to watch while your clients are designing a leave policy is whether they specify which bank holidays count as holidays or just generically mention “bank holidays”. This usually wouldn’t be that different but the last few years have thrown a few new one-off bank holidays into the mix – like Coronation. If your clients have just said “bank holidays” they will need to honour this and pay employees for that day off.

Automate 52-week averaging for part time employees

Holiday entitlement and pay is quite clearly designed around traditional full time workers.

Administering payroll for those kinds of employees is straightforward – you pay them the exact same amount every month, whether they take annual leave or not. You will still need to calculate their entitlement for legal reasons and in case they leave suddenly, but in terms of actual pay it is fairly straightforward, and you can calculate things in terms of days.

But not all workers work 40 hours a week. Part-time, shift, and casual workers are all also entitled to paid time off. But working out exactly what they should be paid for this work is more complex – and has recently changed thanks to a court ruling holding that part-time workers on permanent contracts are entitled to a full 5.6 weeks of leave. This is likely to change soon as the Government are consulting on a response to that case, but for now these workers are entitled to a full 5.6 weeks of leave.

This is fairly simple if the part time worker works the same hours every week and works every week – they are paid their normal weekly pay for the week they are off. But if there hours change dramatically the “52 week averaging” process is used to work out the exact rate of pay, where the last 52 weeks that they were paid is used to calculate what they should earn on holidays. (Crucially, this takes in the last 52 weeks they were paid, but can actually go back as much as 104 weeks to cover weeks in which they were not paid at all.)

This is a complicated process with many avenues for error. (For example many people would consider the week Monday-Sunday, but in this case it is actually Sunday-Saturday). It needs to be done fresh every time an employee wants to take leave. Doing it manually across several spreadsheets would take hours every time an employee wanted to take leave – and still leave the possibility of under or overpaying an employee.

Luckily, sophisticated payroll software like Employment Hero Payroll makes this kind of process both simple and compliant.

Retaining flexibility

Most payroll or accountancy systems will work okay under absolutely optimal conditions – a normal year with no pandemics or new bank holidays or changes to legislation or employees doing anything other than the 9-5.

But as these last years have shown, these optimal conditions rarely ever exist. Legislation changes – indeed it could change later this year as the UK replaces EU working time regulations, although for now we have very little clarity on what that might look like. New bank holidays like the Coronation or Queen’s Funeral pop up. Or something complex happens within a company that requires special care.

To be ready for this you and your clients need a system that has some flex in it. The legislative settings for payroll will never stay still forever and you can’t be worried that any change will result in hours of tinkering to get right before a pay run. Generally the best software for these flexible systems are run on the cloud – so they are always up to date with new changes, and able to be patched on the go.

I have a good rule of thumb for checking if your current system is ready for the kind of flex it might need in the future: How did it handle Covid-19? Did you and your clients spend hours trying to get furlough payments worked out or was it relatively simple? If your system survived that with flying colours, it will probably be able to handle all that holiday pay can throw at you.

By Suzanne Gallagher, Head of UK Payroll at Employment Hero

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