While signing up a contract with an umbrella company, many contractors are not aware of or remain confused about holiday pay with regards to the payment. This article explains what is meant by holiday pay and how it works out for contractors working with an umbrella company.
What does Holiday Pay mean?
When you sign up with an umbrella company, you become an employee of that company. As an employee you are entitled to certain benefits, one of these is Holiday Pay.
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Holiday pay is a statutory entitlement under the Working Time Regulations (WTR) 1998.
When you are employed with an umbrella company, this legal entitlement ensures that you will be paid when you take time off and you can use this allocation to fund time off between contracts or a holiday you have planned.
This is to be noted that employment cost is never incurred by the umbrella company themselves, it is taken from the contract rate that your umbrella company receives from the end client or the recruitment agency.
How much holiday pay are you entitled to?
Under the WTR, all PAYE employees are entitled to at least 28 paid holidays each year equivalent to 5.6 working weeks, leaving you with 46.4 working weeks.
It is on the employer whether or not bank and public holidays are to be included within this 28 days limit.
How is holiday pay calculated?
12.7% of gross taxable pay is typically used to work out holiday pay. The following calculation has been used to work out holiday pay:
5.6 weeks (minimum statutory pay) is divided by 46.4 weeks (working weeks)
5.6/46.4 weeks = 12.07%
If you work for part of the year, your holiday pay will be calculated on a pro-rata basis.
Holiday pay recorded as a separate entity
Under the terms of Working time regulation (WTR), holiday allowance along with bonuses and overtime pay is a taxable income and can not be included in basic pay. So all umbrella companies are obliged to include your holiday pay as a separate entity on your payslip.
How will you receive your holiday pay?
There are two main methods by which you can receive your holiday pay as an umbrella company employee.
Rolled up pay method
If you opt for this method you will be paid along with your salary each week or month. This means you are always up to date with any entitlement you owed.
Accrued pay method
With this method, your employer will keep your holiday pay aside until the end of the financial year or till the termination of the contract.
It is the default method adopted by many umbrella companies. The major drawback of this model is that if the contractor fails to claim any outstanding holiday pay before the end of the year, they will lose the unclaimed entitlement.
Some unethical companies may exploit this 'use it lose it' policy to pocket any holiday entitlement which remains unclaimed by the contractors at the year-end.
Conclusion
Transparency is the key when it comes to the contractor working for an umbrella company. Before signing up with an umbrella employer, you need to check for the terms of your contract and company handbooks carefully so that you are aware of exactly how and when you will receive your statutory entitlements.
Disclaimer
This article is for information purposes only. We strongly recommend taking professional advice or an expert opinion before reaching any conclusion. We have a team of umbrella companies who can help you with your queries, please feel free to review them. You can also write us an email at [email protected].