Some companies allow employees to buy or sell annual holiday at a rate of 1/260 of annual salary per day. This rate is the standard payroll rate in the UK for such calculations. But it is unfair, especially to part-time employees.
Here is an example to explain why. To make the example clear, it is necessary to suppose that the maximum amount of holiday that can be purchased is quite high. But this doesn’t alter the principle, and the calculations could easily be redone with whatever limits a particular company has put in place.
Suppose Adam works full-time on a salary of £50,000. He has 25 days’ holiday a year and there are 8 bank holidays. There are 260 working days in a year, so Adam actually works 260-25-8 = 227 days in the year.
Eve has an identical salary to begin with but then negotiates a modest part-time arrangement of 9-day fortnights, so 90% of full time. The company agrees to pay 90% of her full-time salary, which is £45,000. As is usually done with part-timers, her annual holiday entitlement is also reduced to 90% of the previous level, so she has 22.5 days’ holiday. Suppose for now that Eve’s reduction in working time is small enough for bank holidays to be ignored in the negotiations: she will still get all 8 bank holidays as before. Eve’s part time arrangement therefore means that she will be working (260 x 0.9) – 22.5 – 8 = 203.5 days. This is slightly less (by 0.8 days) than 90% of Adam’s 227 days because we have decided to ignore the bank holidays.
Now suppose Adam and Eve have a relationship and Adam decides that he would like to buy extra holiday to be with Eve on all her days off. As I said, we are allowing him to buy quite a lot of holiday. He needs to buy 227 – 203.5 = 23.5 days. The typical arrangement would allow him to buy this holiday at 1/260 of his salary per day. So he has to pay £50,000 x 23.5 / 260 = £4,519 to get this holiday. So working exactly the same number of days as Eve, he will end up with a salary of £45,481 compared with Eve’s £45,000. Unfair! Actually, Eve's deal is fair, it's Adam's that is unfair by comparison.
Why does this happen? It is because the rate of 1/260 is too cheap! We consider our annual holiday to be paid holiday. In other words, our salary is spread over the year including the time we take off as holiday. Paid holiday is not a free gift from the company to all employees – we effectively earn it by working. A half-timer does not get 25 days a year but 12.5 days, or 25 half-days. So when we reduce an employee’s hours in a part-time arrangement, we reduce their working hours, their holiday and their salary pro rata.
By contrast, allowing Adam to buy his holiday at 1/260 of salary per day is effectively allowing him to keep his full 25 days’ original holiday entitlement even when he starts to reduce his working time.
How do we make it fair? We charge for bought holiday according to the number of days Adam actually works for his full-time salary. He works 227 days, so we should perhaps charge him 1/227 of his salary. Then, when he buys his Eve-leave of 23.5 days, he pays £50,000 x 23.5 / 227 = £5,176. This is a bit more than Eve has “paid” because of the bank holidays. So a compromise might be to suppose that bank holidays are a free gift; this works reasonably well even for “stronger” part-timers because some of the bank holidays will probably fall on the part-timer’s days off. So with this compromise we include the 8 bank holidays but not the 25 days’ annual holiday in Adam’s holiday purchase rate. So he should buy holiday at 1/235 of his salary. At that rate, his Eve-leave of 23.5 days will cost him £50,000 x 23.5 / 235 = £5,000, and he ends up exactly the same as Eve.
The nature of bank holidays does complicate matters slightly, but the headline result is that the number of working days used to calculate the daily rate should be reduced by the employee’s annual holiday entitlement. For companies that offer 25 days’ annual holiday, a much fairer rate would therefore be 1/235 rather than 1/260. This is an increase of 10.6%. Not only is it fairer to part-timers by comparison, it means the company will receive more for purchased holiday.
The other side to all this is that 1/260 is an unfairly low rate when employees wish to sell holiday. If Cain earns £50,000, he is receiving £50,000 / 235 = £212.77 on average for every day he goes into work (we are assuming now that bank holidays are full working days). But if he wants to sell holiday, every extra day he comes into work he will only earn £50,000 / 260 = £192.31. Quite a big difference! One way of thinking of this is that if Cain works for more days, by rights he should be given back a little bit of paid holiday for every extra day he works. The exact figure should be 25 / 260 = 0.096. This means that if he works an extra 10 days he should be given approximately one day’s holiday, so in fact he need only work 9 days. So if we really must keep the 1/260 rule, we would need to start giving employees extra annual holiday pro rata to the number of extra days worked.
So, in summary, allowing an employee to buy holiday at 1/260 is unfair on both the company and on part-timers, and giving an employee 1/260 for holiday he sells is unfair on the employee. A fairer figure would be 1/235 or, in general 1 / (260 – usual annual holiday entitlement)
If there is an absolute need to stick to 1/260, then employees purchasing holiday should lose some of their original annual holiday pro rata, and employees selling holiday should receive additional annual holiday pro rata. But that is very messy and difficult to understand; the equivalent measure of using 1/235 is surely the better option.
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