How to calculate leave entitlements
Employees that have worked for less than 12 months:
If an employee has worked for less than 12 months, the calculation is straightforward. They should be paid 8% of their gross earnings since they started employment, minus any annual leave that was taken in advance or paid on a pay-as-you-go basis. You’ll also have to pay out any contractual benefits owing.
Employees that have worked for more than 12 months:
For someone that has worked longer than 12 months, it gets a little more complicated. In this case the employee’s leave entitlements will be made up of three things:
- Any annual leave entitlement owing
- Any public or alternative holidays owing
- Any annual leave accrued
What is accrued annual leave?
Accrued annual leave is the leave someone earns up until they get their full four-week entitlement. The Holidays Act 2003 states that employees only become entitled to their four weeks of annual leave every 12 months, so accrued leave is a useful tool to show you how your employees are progressing towards their full four-week entitlement.
Imagine someone has worked in a role for 18 months. If their employment ended at this point, they would receive their four week entitlement at 12 months, and effectively six months of accrued leave in their final pay. Any annual leave they had taken in advance would be subtracted from their leave balance.
How to calculate annual leave accrual for final pay
Let’s break this calculation down into four steps:
- Calculate the employee’s gross earnings from when they last received their annual leave entitlement to the date their employment ends.
- Add the value of any unused annual leave, public holidays and alternative holidays owing to these gross earnings.
- Work out 8% of this sum.
- Subtract any annual leave taken in advance or paid on a pay-as-you-go basis.
Something to look out for…
On termination, an employee’s final day of work is notionally extended by any annual leave entitlement not taken. This is to determine if an employee is entitled to public holidays that fall within this extended period. It has nothing to do with notice periods and is different from the date on which the employment agreement is terminated.
This means that if an employee had three weeks of annual leave owing, an employer would need to add three weeks to the employee’s end date. If a public holiday fell within this three-week notional extension, and the employee would normally work on that day, the employer would need to account for the public holiday in the employee’s final pay.