According to www.gov.uk, “almost all people classed as workers are legally entitled to 5.6 weeks' paid holiday a year (known as statutory leave entitlement or annual leave).”
The period of 5.6 weeks (the equivalent of 28 days) applies to workers who work a standard five-day week, while statutory leave is calculated on a pro-rata basis for part-time workers, depending on the number of days per week they work.
The term “worker” applies to:
- agency workers
- workers with irregular hours
- workers on zero-hours contracts
The above, therefore, applies to contractors engaged via umbrella companies and the umbrella's are obligated to ensure that the contractor is paid their holiday pay.
Holiday pay calculations.
So how do we calculate holiday pay?
For contractors paid hourly or daily, an element of the contractor's pay rate is set aside as holiday pay. As confirmed in a recent UK government consultation, the calculation for holiday pay is as follows:
52 total weeks in a year
Less 5.6 weeks annual leave = 46.4 working weeks
Divide the number of annual leave weeks (5.6) by the number of working weeks (46.4),
5.6/46.4 = 12.07%
Therefore, for every hour or day a contractor works, 12.07% of their pay rate is apportioned for paid holidays.
Holiday pay options.
The term holiday pay is self-explanatory. It refers to being paid whilst taking a holiday.
However, the process of paying holiday pay is more complex. There are, in fact, two separate methods by which holiday can be paid.
Accrued holiday pay
The most common approach for paying holiday pay is the accrued holiday pay method.
Accrued holiday pay is when 12.07% of the contractor's pay is set aside and accrues as the contractor works. When the contractor takes annual leave, the umbrella company draws funds from the accrued holiday pot and pays it to the contractor.
Rolled-up holiday pay
The second option for paying holiday pay to contractors is commonly known as rolled-up holiday pay.
Using the same calculation for holiday pay, the rolled-up holiday pay method adds the 12.07% element onto the contractor's hourly or daily rate and is paid as the contractor works.
In effect, the rolled-up holiday method pays holiday pay in advance rather than when the contractor takes annual leave. It is usually down to contractor preference which method the umbrella company applies.
More holiday pay information.
You can find more technical information on holiday entitlement and holiday pay at:
https://www.gov.uk/holiday-entitlement-rights/holiday-pay-the-basics
Alternatively, contact the Champion Contractors team on 0161 703 2549 or email info@championcontractors.co.uk.