Before setting up the 'normal rate' calculation in PayFit, you should first take a look at our Help Centre article that explains what counts as normal rate holiday pay and when it applies. This article focuses on how to apply and manage 'normal rate' holiday pay in PayFit.
How many weeks are used in the pay reference period?
When a worker takes annual leave, their holiday pay is based on their average weekly pay over a reference period of up to 52 weeks. This includes regular overtime, other regular payments, and contractual pay.
Weeks run from Sunday to Saturday, so the first week in the reference period is the one ending on the Saturday before the leave begins.
For regular workers, the average is based on weeks in which the worker received pay. If a week wasn’t worked or the worker was on statutory sick or parental leave, it’s excluded, and the reference period looks back another week, up to a maximum of 104 weeks to find 52 paid weeks.
For irregular workers, only weeks when the worker was on statutory sick or parental leave are excluded. Weeks where they didn't work are still included.
If there are not 52 weeks of pay to use in the calculation, for example, they haven't been employed long enough, the average is calculated based on the number of weeks' available.
Activating the pay reference period
In PayFit, you can activate the pay reference period for all employees or specific employees. Choose the relevant option below.
For all employees
To set this up:
From the left, choose Company Settings, then Payroll Set-up.
Under the Leaves section, click Edit annual leave, then click Next.
Under the Pay reference period section, toggle on the Would you like to use the pay reference period to calculate annual leave? option.
Click Save.
For individual employees
To do this:
From the employee's record, click the Leaves tab.
In the Annual Leave section, click Customise annual leave policy.
Scroll down to the Calculation section, then toggle on the Use pay reference period calculation option.
Click Save.
Note: If you want to exclude all additional bonus, commission, and overtime payments:
From the employee's record, click the Leaves tab.
Under the Annual leave section, click Pay reference period.
Toggle on the Do not include bonuses, commissions and overtime.... option.
Click Save.
Employees will now be paid annual leave at a rate based on their average pay in the last 52 paid weeks.
Adding weekly pay from your previous software
If you haven't used PayFit for as long as 104 weeks, you may need to import the pay history. This ensures the normal rate calculation is correct from day one. You can do this for all employees or for individual employees.
Note: The option to add previous pay information is only available if you have less than 104 weeks of pay information in PayFit.
Import pre-onboarding weekly pay for multiple employees
To import pre-onboarding pay for all employees:
From the left, choose Company settings, then Payroll set-up.
Under the Leaves section, click Edit annual leave, then click Next.
Under the Pay reference period section, click Add pre-onboarding weekly pay.
Use the template to add the missing weeks and import the completed file into PayFit.
Import pre-onboarding weekly pay for individual employees
From the employee's record, click the Leaves tab.
Under the Annual leave section, click Pay reference period.
Then click Pre-onboarding weekly pay.
Under the Onboarding weekly payments section, add the weekly payments prior to onboarding.
How is the holiday rate calculated?
The calculation for an employee's holiday rate differs depending on how they're paid.
Employees paid an hourly rate
For an employee paid hourly, with a zero-hour contract, a variable shift pattern, or simply paid an hourly rate for their weekly hours, their annual leave can be paid in hours.
Their average hourly rate is calculated using the pay reference period above. The hourly rate is calculated as the total pay for each week divided by the number of hours worked.
Example
The employee works 27 hours a week. They receive an hourly rate of £14 and a separate commission payment of £500
Their total pay is (27 hours x £14) + £500 commission = £878
Their hourly rate is calculated as £878/27 hours = 32.52
The same calculation is applied to each of the 52 weeks worked prior to the holiday period to get an average hourly rate based on the pay reference period.
Employees paid a monthly or annual salary
For an employee paid a monthly or annual salary, they would usually take their annual leave in days. Therefore, we need to convert the employee's monthly pay to a daily rate.
If the employee receives an annual salary, we divide it by 12 to determine their monthly salary.
Next, we calculate the weekly rate. To do this, we take the monthly pay and divide it by the number of business days in the month. Then, we multiply this by the number of business days in the week. If there are any additional payments, like commission, bonus, or overtime, paid within the week, we add those to the relevant week too.
When the employee takes annual leave, we use the total of up to 52 weeks of pay, divided by the number of weeks used, to calculate the average weekly pay.
The average weekly pay is then divided by the number of business days in the week, to calculate the daily holiday pay rate.
Example
The employee works three days a week and receives a monthly salary of £3000.
In January, they receive their normal monthly salary of £3000, and there are 13 business days in the month. They also receive a commission payment of £500 on 8 January.
The employee's daily rate is first calculated based on 13 business days in the month.
£3000 / 13 business days = £230.77 per day
Then, to calculate the employee's average weekly pay:
Week commencing 1 January: Weekly pay is £230.77 * three working days = 692.31
Week commencing 8 January: weekly pay is (£230.77 * three working days) + £500 commission = 1192.31.
Reconciling the calculated rate
This page also shows the employee's weekly pay and hours over the previous 52 to 104 weeks (depending on how many weeks were unpaid), so you can reconcile their annual leave daily rate based on their average pay.
Tip: You need to add the annual leave first.
From the employee's record, click the Leaves tab.
Under the Annual Leave section, click Pay reference period.
Under the Annual leave pay this month section, you'll see the total annual leave pay this month and an option to override this if necessary.
You'll also see that for each period of annual leave, it displays the number of days and the calculated daily rate.
To reconcile this value with the Weekly pay recorded on PayFit section, use the 52 weeks of pay prior to the start of the annual leave to calculate the employee's average daily rate
Tip: You can download the weekly pay information to Excel or CSV to make it easier to perform your calculations.
FAQs
How is the rate displayed on a payslip?
The daily rate to be paid for annual leave will show on the payslip, and the calculation is based on the average weekly pay for the last 52 weeks, including pre-onboarding figures if you added these.
How do I exclude certain pay items?
Additional pay items are included in the employee's weekly pay as long as the payment is set to be regular. To exclude the pay item, you must deselect the This payment is regular toggle option when setting up a pay item:
What happens if the holiday rate is lower than the employee's basic rate?
In some cases, an employee's calculated holiday rate might be lower than the employee's usual basic rate. For example, they've recently had a pay increase.
In this case, paying the calculated holiday rate would result in the employee being paid less than their contractual rate. Although this isn't incorrect, PayFit pays the employee's current basic rate to ensure they're not negatively impacted by using the average pay reference period calculation method.