Furlough – Calculation of Holiday Pay

Introduction

Although not covered by NAECI and whilst most contractors appear to have met the requirements for the calculation of holiday where periods of furlough are/were involved, guidance is still being requested from time to time.  In general, time spent on furlough should be excluded from holiday pay calculations.  In order to clarify this further, references from HMG, ACAS and CIPD are reproduced here to assist:

HMGhttps://www.gov.uk/guidance/holiday-entitlement-and-pay-during-coronavirus-covid-19#holiday-pay

Holiday pay
The amount of pay that a worker receives for the holiday they take depends on the number of hours they work and how they are paid for those hours. The principle is that pay received by a worker while they are on holiday should reflect what they would have earned if they had been at work and working.

Holiday pay, whether the worker is on furlough or not, should be calculated in line with current legislation – see the standard guidance, based on a worker’s usual earnings. The underlying principle is that a worker should not be financially worse off through taking holiday. Where a worker has regular hours and pay, their holiday pay would be calculated based on these hours. If they have variable hours or pay, their holiday pay is calculated as an average of the previous 52-weeks of remuneration excluding weeks in which there was no remuneration.

Furloughed workers
An employer should not automatically pay a worker on holiday the rate of pay that they are receiving while on furlough, unless the employer has agreed to not reduce the worker’s pay while on furlough.

If a worker on furlough takes annual leave, an employer must calculate and pay the correct holiday pay in accordance with current legislation – see the standard guidance. Where this calculated rate is above the pay the worker receives while on furlough, the employer must pay the difference. However, as taking holiday does not break the furlough period, the employer can continue to claim the 80% grant from the government to cover most of the cost of holiday pay.

ACAS: https://www.acas.org.uk/checking-holiday-entitlement/calculating-holiday-pay

No fixed hours
If your work has no fixed or regular hours, your holiday pay will be based on the average pay you got over the previous 52 weeks. For example, if you do casual work on a zero-hours contract or shifts that change without a fixed pattern.

If for any of the 52 weeks you got no pay at all, use an earlier week in its place for calculating holiday.

If you get a small amount of pay for a week, for example Statutory Sick Pay, you should use another week where you received your usual pay for calculating holiday. This is because you should get paid the same when you’re on holiday as when you’re at work.

You should only count back as far as needed to get 52 weeks of your usual pay. If necessary, you can look at the pay you got over the previous 104 weeks, but no further.

CIPD Guidance

Holiday pay
A worker on furlough should have holiday pay based on their normal rate of pay (ie their pre-furlough wage). The calculation of holiday pay is based on earnings, not hours worked. The average pay from the employee’s last 52 weeks of earnings is used as a reference period to calculate the holiday pay. Unpaid leave or other periods where no earnings are received are ignored.

The reference period for calculating holiday pay changed to 52 weeks in April 2020. This was planned before the coronavirus pandemic and is nothing to do with the furlough scheme. However, furloughed employees’ holiday pay can be calculated using the same reference period as for non-furloughed employees.

For workers on a zero-hours contract, the holiday pay they receive is based on their average pay over the previous 52 weeks worked. The reference period increase to 52 weeks from 6 April 2020 applies to all workers including those on zero hours. This period operates in the same way as the previous 12-week period.

Employers count back across the last 52 weeks that the employee has worked and received any pay for work in that week. Weeks in which no pay was received do not count towards the 52-week average. If employees have worked for less than 52 weeks, employers should use as many full weeks of work as possible to calculate the holiday pay.

Because the reference period must include the last 52 weeks for which there were actual earnings, any weeks where no work was performed are not included. So, the reference period may go further back than 52 weeks from the furlough period. Employers should not look back any more than 104 weeks. If the employee has less than 52 weeks in which they earned anything during the last 104 weeks, then the reference period is shortened to that lower number of weeks.

Contractual overtime worked during the reference period and certain other pay components should also be included in holiday pay calculations.

The https://www.gov.uk/calculate-your-holiday-entitlement helps calculate how much holiday a worker on irregular hours or a zero-hours contract is entitled to within a current leave year.

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