How to Calculate Vacation Pay Correctly and Avoid Costly Errors

What is vacation pay

Vacation pay is given when an employee takes paid time off. It covers statutory leave and any extra paid vacation time an employer grants.

• United Kingdom Working Time Regulations require paid leave for most workers.

• United States There is no federal law that requires paid vacation. It is a matter of company policy or a collective bargaining agreement unless a state law treats accrued vacation as wages that must be paid out.

Vacation pay in the UK

Holiday pay keeps rest paid and predictable.

Statutory entitlement and working time requirements

Under the Working Time Regulations WTR most workers are entitled to 5.6 weeks annual leave. This is made up of:

• 4 weeks EU derived leave paid at the normal rate

• 1.6 weeks additional UK leave paid at the basic rate
  Key rules now codified include carry over and what counts as normal remuneration. Highlights:

• If a worker cannot take leave because of maternity or other family leave they can carry over up to 28 days.

• If sickness prevents leave, up to 20 days can carry over and must be used within 18 months.

• Employers must give workers a real chance to take leave and explain that unused leave may be lost, or the worker can carry it over.

• Normal remuneration for the 4 weeks includes regular overtime, commission, and status related payments. Many employers pay the whole 5.6 weeks at the normal rate for simplicity.

Holiday pay calculation rules

How to calculate vacation pay based on a week’s pay depends on the worker’s pattern.

• Fixed hours and pay: Salaried employees receive the same amount they would earn if working that week.

• Normal remuneration for the 4 weeks must include:

  • Regular overtime pay

  • Commission linked to contracted tasks

  • Payments tied to status or qualifications

• Reference period: For workers without fixed hours, use a look back to average pay. The long standing rule is a rolling 52 week paid weeks reference. Where using the new regime for eligible workers, an averaging method also applies for sickness or statutory leave.

New regime for irregular hours and part year workers

For leave years beginning on or after 1 April 2024 the law sets a specific system for irregular hours and part year workers.

• Who qualifies: Workers whose paid hours vary in each pay period or who work only part of the year.

• Entitlement accrual: 12.07 percent of actual hours worked in the pay period up to a cap of 28 days.

• Rolled up holiday pay is now allowed for these groups. Pay an extra amount in each pay period and show it as a separate line on the payslip.

• Alternative: Employers may still use the 52 week reference method instead of rolled up.

• When off sick or on statutory leave: use the 52 week relevant period to keep paying an average holiday pay amount.

At a glance for payroll teams

• Calculate accrual each pay period using 12.07 percent of total hours worked

• Track vacation hours and itemise rolled up amounts on payslips

• Keep records of total vacation hours, taken vs accrued, and any carry over

• For hourly employees and hourly workers, ensure the vacation pay rate reflects normal remuneration where required

Vacation pay in the US

Across the US, vacation pay follows company policy first, state rules second.

No federal mandate for vacation pay

Federal law does not require paid vacation or paid time off. The Fair Labor Standards Act does not require payment for time not worked, such as vacation time or sick leave. Any paid vacation time arises from company policy, contract terms, or a collective bargaining agreement.

State level requirements on payout and policy enforceability

Some states treat accrued vacation as wages and restrict use it or lose it rules. Two important examples:

Because state laws vary, most companies should put clear PTO payout terms in writing and align them with state laws where they operate.

Discretion, contract terms and employer policy design

Draft a clear vacation policy to set expectations and stay compliant. Points to cover:

• Eligibility and accrual: Spell out how employees earn vacation time for full time employee groups, salaried workers, and hourly workers. Choose either vacation hours upfront at the start of the year or an accrual per pay period or per hours worked.

• Accrual caps and rollover: Define caps and whether unused time rolls over. If operating in states that prohibit employers from forfeiting accrued time, remove any use it or lose it term.

• Payout on separation: State if you will provide a PTO payout and when. Follow any state rules that require employers to pay accrued time as unpaid wages in the final paycheck.

• Rate of pay: Confirm whether vacation is paid at the same rate as regular hours and whether overtime pay, commission, or shift premiums affect the vacation pay rate under applicable law.

• Requests and approvals: Set lead times for advance notice and how employees request time.

• Union settings: Align with any collective bargaining agreement.

• Communication: Explain how many hours employees receive each year, how much vacation time remains in the balance, and how to track vacation pay in the system.

These steps help pay employees paid fairly, support employee morale and employee engagement, and keep your organisation stay compliant across jurisdictions.

How to calculate vacation pay accurately

Clear methods keep payroll clean and trust high.

Standard rate calculation methods

UK week’s pay approach

• For workers with fixed hours, a week’s holiday is paid as if they worked that week.

• For the 4 weeks of EU derived leave, pay must reflect normal remuneration. Include regular overtime, commission, shift premiums and similar payments that are regularly paid. The remaining 1.6 weeks can be paid at basic pay, though many employers keep one method for simplicity.

US policy driven approach

• There is no federal law that sets a vacation pay rate. Employers set the method in the company policy, contract or collective bargaining agreement.

• Common methods

  • Salaried employees: Pay the normal weekly salary for the time off.

  • Hourly employees: Multiply the hourly wage by the approved vacation hours.

  • If policy says so, include commission or shift premiums when you calculate vacation pay.

• Make sure the plan text explains how employees earn vacation time, the pay period accrual, any lump sumgrants, and how to handle a pto payout.

Irregular hours and variable pay workers

UK methods you can use

• 52 week averaging: Use the average of paid weeks to set a week’s holiday pay where hours or pay vary. Exclude weeks with no pay. Keep records so you can evidence the look back.

• 12.07 percent accrual: For leave years starting on or after 1 April 2024, irregular hours and part year workers accrue entitlement at 12.07 percent of hours worked in each pay period, capped at 28 days.

• Rolled up holiday pay is permitted for these workers. Pay the rolled up amount in each pay period at the same rate as normal pay, show it as a separate line on the payslip, and keep accrual records. When the worker is off sick or on statutory leave, pay the average based on the relevant 52 week period.

Practical tips

• For hourly workers who change shifts often, calculate the vacation pay rate from total earnings in the reference period.

• Track the number of hours worked and the total vacation hours accrued each pay run.

• Where you use rolled up pay, still allow the worker to book vacation time and record the unused time balance for compliance.

Carry over and unused vacation rules

United Kingdom

• If a worker misses leave due to sick leave, they can carry over up to 20 days for regular hours workers and up to 28 days for irregular or part year workers. They must take it within 18 months from the end of the leave year when it accrued.

• If someone is on maternity or other family leave, they can carry over up to 28 days.

• If an employer fails to give a real chance to take leave, or fails to inform the worker that unused vacation days may be lost, the worker can carry forward what they should have been able to take.

United States

• Handle unused vacation as your policy states, subject to state laws. Some states restrict use it or lose it and treat accrued vacation as wages on separation. Put the rollover or forfeiture rule in writing and keep it consistent for hourly employees and salaried workers alike.

Payroll & administrative best practices

Good records make correct pay easy.

Payroll integration and tracking holidays

• Sync timekeeping, HR and payroll so employees receive holiday at the same amount they would have earned for regular hours, where required.

• Itemise holiday pay on payslips, especially when using rolled up amounts for eligible workers.

• Track vacation pay with live balances

  • opening balance

  • accrued time this pay period

  • vacation payout or usage

  • closing balance

• Report on hours worked, overtime pay elements included in normal remuneration, and any unused vacation time.

Contract and policy updates

• Update written contracts, the handbook and any collective bargaining agreement clauses to reflect UK 2024 reforms, the 12.07 percent method, rolled up holiday pay, and carry over rules.

• In the US, state your vacation accrual formula, whether you grant vacation hours upfront, if you require employers to pay out on separation under local law, and how you handle a final paycheck.

Employee communication and transparency

• Show staff how much vacation they get, how employees earn vacation time, and how to request time with advance notice.

• Explain rollover limits, vacation payout rules, and what happens to accrued vacation pay when an employee leaves.

• Promote a healthy work life balance. Clear leave rules support employee morale and employee engagement, and help you stay compliant.

Employee scheduling and Time-tracking software!

• Easy Employee scheduling
• Clear time-tracking
• Simple absence management

Try for free Request a demo

Make vacation pay accurate with Shiftbase

Connect entitlement rules to real data with Shiftbase. Our time tracking and employee scheduling feed precise hours worked into payroll so vacation pay is right first time. Manage paid leave from request to payout, while payroll integration posts the same rate as regular hours and keeps records tidy.

What you can do in minutes

• Track balances for vacation time, sick leave, and overtime in one place

• See total vacation hours accrued per pay period for hourly and salaried staff

• Auto include commission or shift premiums when policy requires

• Itemise holiday pay on payslips and export to Excel for audits

• Set rules for use it or lose limits, rollover, and vacation payout on exit

• Sync absence management with rotas to prevent overbooking and control cost

Cut manual checks and help staff feel paid fairly. Start a clear path to compliant, error free payroll. Try Shiftbase free for 14 days