Holiday Accrual and How to Handle Holiday Pay Accruals in your Business
8th June 2018
There are many HR duties that you need to stay on top of when running a business. One of these duties in particular might include accounting for holiday pay accruals for your employees. Keeping ahead of the game can prove difficult, especially in a fast paced and thriving company, which is why we have compiled a guide on holiday pay entitlement and how accruals work.
Holiday Pay Accruals Explained
FRS 102, the most recent accounting guidelines, introduced extra demands on finance departments that require firms to consider the amount of outstanding holiday held by their employees at the year-end as a potential accrual.
Businesses issuing a holiday accrual is not considered to be mandatory by law unless the result is material, which means that you will need to make an adjustment at the end of the holiday calendar year if the anticipated shortfall of holiday taken by staff is significant enough.
Materiality is judged based on a number of factors; therefore, it may be necessary to consult an auditor to assess whether holiday accrual is required. For this reason, it is always advised that all relevant information is at hand to decipher if holiday accruals are a requirement for your business, and so it is fundamental to maintain reliable holiday and sickness records throughout the year.
In a bid to reduce the potential difference at the end of the year, many companies send their staff reminders about their holiday entitlement, including how many days they have left to take and when to take them by.
Most workers are legally entitled to a statutory entitlement of 5.6 weeks (28 days) paid holiday per year; however, some employers may opt to use a holiday accrual system under the Working Time Regulations in place of an up-front allowance.
Holiday pay entitlement starts to build up from the moment that the employee begins work, and accrues in proportion to their annual entitlement on a monthly basis.
For example, a full-time member of staff who has been employed for six months would have built up 6/12ths (or one half) of their annual entitlement. As the average annual allowance for a typical nine to five job is 28 days, the employee would have accrued 28 X 6/12 = 14 days.
Working out holiday entitlement using an accrual system is particularly useful for companies who regularly onboard temporary staff.
If an employee who has their full annual entitlement available up-front was to use their entire allowance in the first six months but ended their employment before the end of the company’s holiday year, the HR department would be left having to work out how much money is owed back to them – consequently, this would also mean having to make adjustments to the employee’s final pay cheque too. While issuing a holiday accrual system is not mandatory by law, the biggest benefit that it can provide is the knowledge that a staff member will have only ever taken the amount of paid leave that they earned in the period they worked.
At the end of employment, any holiday that an employee has accrued but has not used will be owed to them in the form of monetary payment.
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