Payroll is an important concern for every employed individual, but not everyone may understand exactly how leave pay is calculated. The calculation of leave pay is based on the employee's current weekly pay rate or the rate of the employee's average weekly earnings over the last 12 months, whichever is higher. The calculation of an employee's weekly pay rate excludes any payments you are not bound to pay by the terms of employment. It also excludes expense reimbursements, bonuses and commissions and anything that is not fixed in advance or is determined by the employee's performance.
Divide the employee's gross earnings for the past 12 months by the number of weeks in a year to calculate the employee's average weekly earnings; the number of weeks in a year is 52. For example, if the employee's gross earnings for the last 12 months are estimated to be £33,800, his average weekly pay is £650.
Use the employment contract to determine the employee's current weekly pay. For example, suppose the current weekly pay of the employee is £780.
Subtract the number of weeks of unpaid leave, if any, from the number of weeks in the year. For example, if the employee took two weeks of unpaid leave, the number will be 50.
Adjust the average weekly earnings of the employee for any extra unpaid leave during the year by replacing the denominator in Step 1 by the number estimated in Step 3. The employee's adjusted for unpaid leave weekly average gross earnings are £676 (52,000/50).
Multiply the weekly gross earnings or the current weekly pay, whichever is higher, by the number of weeks of paid holidays entitled to the employee. For example, if the employee is entitled to four weeks of paid leave, he is entitled to £3,120 ($1,200 x 4) in leave pay.
Note that the current weekly pay determined in Step 2 ($1,200) is used in the calculation, as it is higher compared with the figures calculated in Steps 1 and 4. If the average gross weekly earnings were higher compared with the current weekly pay, the calculation for leave pay would use the higher figure.