Holiday Pay – why do businesses get it wrong?

29th August, 2017

Holiday Pay, on the surface, is pretty easy to get right – but time and again businesses find themselves on the wrong end of the stick.

The purpose of the Holidays Act is to promote a balance between work and employees’ personal lives and provide employees with minimum entitlements to:

  • Annual holidays to provide the opportunity for rest and recreation
  • Public holidays for the observance of days of national, religious, or cultural significance
  • Sick leave to assist employees who are unable to attend work because they’re sick or injured, or because someone who depends on the employee for care is sick or injured
  • Bereavement leave to assist employees who are unable to attend work because they have suffered a bereavement

Why do businesses get it wrong?

There are two ways holiday pay can be calculated – based on ordinary weekly pay at the beginning of the holiday or the average weekly earnings over the previous 12 months.

Employers must pay whatever gives the employee more money.

It’s when businesses don’t use the correct calculation that they get it wrong. There are many different reasons businesses use the wrong calculation:

  • Some employers haven’t taken their responsibility seriously
  • Systems are not always set up correctly
  • Employment agreements not always comprehensive
  • Lack of communication inside workplace – finance, HR, operations, payroll
  • Changing work patterns not always reflected in systems
  • Miscalculations often affect employees who have:
  • fluctuations in hours worked
  • receive additional pay on top of normal wages
  • All payroll calculations need to be tailored to the individual business’ operating model

Complexity of working arrangements and different business models means a one size fits all approach is not possible.

Annual Holiday (Leave) Pay

Permanent employees are entitled to four weeks annual leave. This is normally calculated using the greater of:

  •  Ordinary Weekly Pay – the amount of pay that the employee receives under his or her employment agreement for an ordinary working week when it’s not practical to define what an ordinary week is (e.g. if staff work variable hours) you can use the average of the gross earning four weeks prior to the leave
  •  Average Weekly Earnings – the average of the gross earnings 52 weeks prior to the leave

Bereavement Leave, Alternative Holiday, Public Holiday & Sick leave (BAPS)

  • In the first instance, are paid using Relevant Daily Pay (RDP)
  • If RDP is not possible or practicable, or employee’s daily pay varies within pay period that BAPS falls, Average Daily Pay (ADP) is used
  • Must fall on an Otherwise Working Day (OWD)

RDP – The amount the employees would have earned had they worked that day

ADP – This is a daily average of the employee’s gross earnings over the past 52 weeks. This is worked out by:

  • adding up the employee’s gross earnings for the period
  • dividing this by the number of whole or part days the employee either worked or was on paid leave or holidays during that period

OWD – A day an employee would have normally worked


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This post has been updated from the original