Holiday Pay For Contractors

While limited company contractors, as with all company owners, are not entitled to any annual provision of holiday time, in contrast, due to being employed, contractors working through an umbrella company can still access these benefits.

In this article, Umbrella Supermarket examines:

 

  • the holiday entitlements that umbrella engaged contractors receive
  • how umbrella companies pay contractors their holiday pay
  • the duty of care umbrella companies have to contractors on holidays.

Umbrella companies and contractor holiday entitlement

Despite appearances externally, contractors working through umbrella companies are employees – in exactly the same way as the people who are employed by your client. What separates your employment from that of the people working around you in your client’s premises is that you are employed by your umbrella company.

Under current UK legislation, all employees are entitled to 28 days’ holiday a year – your employer is entitled to include bank holidays as part of what is known as your “statutory leave entitlement.” (source: UK Government)

You do not get 28 days’ leave automatically from the start date of your engagement with your umbrella company. You will likely work full-time for your umbrella company and you will accrue these holidays during the year. Any time taken off for maternity, paternity, and adoption leave or when you’re off sick does not affect the accrual of your available holiday days.

If you work only three days a week on average, your umbrella company must offer you statutory leave entitlement pro-rata’d to your actual working schedule. For example, if you work 2 days a week instead of 5, then you are entitled to two fifths of 28 days’ holiday (or 5.6 holiday days a year).

If you work for more than five days a week, this does not mean that you will receive additional statutory leave entitlement – this will still be at 28 days’ per annum.

Contractors working for an umbrella company are agency workers – defined by the TUC as a worker "engaged through, or by, an employment agency or bureau and supplied to a hiring employer on a temporary basis." The Agency Workers Regulations (AWR) will therefore probably apply to you.

AWR means that contractors must receive equal treatment as the end client’s own employees. After 12 weeks of continuous employment in the same role, you must enjoy exactly the same terms and conditions in your engagement as the end client’s own employees, including pay and any annual leave above the statutory leave entitlement. For example, if the staff around whom you work are all entitled to 38 days’ holiday a year, you will also be after you have worked for the client under the umbrella company’s direction for 12 weeks.

Under the AWR, your holiday pay should be determined by the following formula – your earnings over the last 12 weeks divided by the number of hours you’ve worked in the last 12 weeks. This will give you a base figure upon which to work out your actual holiday pay. If, during the last 12 weeks, you took a week or more off, simply include the last 12 weeks in which you did actually work to make the necessary calculation.

 

How umbrella companies pay contractors their holiday pay

Most umbrella companies will offer you a couple of options on what you want to do with your statutory holiday pay. It’s important to remember that you are funding your own holiday entitlement as opposed to it being funded by the umbrella, as pointed out on Contract Eye.

Most umbrella companies like to keep holiday pay simple. Typically holiday pay is worked out as 12.07% of your hourly rate. This rate is arrived at by dividing the number of weeks that statutory leave entitlement takes up of the year (in the case, 5.6 weeks (or 28 days)) by the number of weeks remaining (46.4 weeks (or 232 days)).

How you receive that 12.07% is up to you, but by far the most common method is in your pay packet.

Receiving 12.07% of your pay in your payslip is called “rolled up holiday pay”. If you choose this option, then when you are taking time off from work, you won’t receive separate holiday payments into your bank account.

Alternatively umbrella companies may choose to withhold a certain percentage of your pay every week. This withheld amount is then paid in the standard way when a contractor is actually on holidays. Both methods should result in the contractor receiving the same pay throughout the year, however rolled up holiday pay is the more common choice as it means contractors can collect their holiday pay cash quicker.

Recently introduced, the Working Time Regulations now mean that your umbrella company must show your holiday pay separately on your payslip – umbrella companies, as with all other employers, are no longer permitted to include it in “basic pay” on your payslip.

 

Umbrella companies and their holiday pay duty of care

Whichever umbrella company you choose, they have a duty of care to you to ensure that you get paid for the time covered by your statutory leave entitlement. That said, mistakes do happen and you should check the itemisation of your earnings on every payslip you receive from your umbrella company.

Under the Working Time Regulations (Section 13(9)), if you don’t take statutory holiday during the year (that is, you take less holiday than you were entitled to during the year), you lose that holiday pay unless you and your umbrella company have come to a separate agreement between you that you can carry forward unused holiday time from one year to the next.

In the vent your Umbrella Company has withheld money for your holidays, there is a possibility that you could lose that money altogether if you don’t claim it.

It is possible for contractors, as with every other type of employee, to take their case for unpaid holiday pay to an employment tribunal however this must be done within three months of the end of their employment contract.

Umbrella contractor holidays – asking the right questions

There are hundreds of umbrella companies in the UK right now competing for your business but how do you find the one that’s the right fit for you? By comparing umbrella companies online with Umbrella Supermarket, you can compare on the treatment of holidays as well as a range of other important factors.

Time to make more of your money. Start spending less time on taxes and more time on holiday. To start your search, please click here.

 

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