A Fair Day's Pay

The concept of a fair day's pay based on annual salary should not be difficult, should it?  Of course not!  But what should it be?  Is it 1/365 of annual salary, because there are 365 days in a year?  Or should it be 1/260, which counts only "working days" (Mondays to Fridays) in the calculation?  Or 1/252, because there are also 8 bank holidays?  Or, for a company that offers 25 days' annual leave, should it be 1/227?

Most of the time it doesn't matter.  We work a certain number of days per year and our pay is usually spread over the year in 52 or 12 equal portions.  But it does start to matter when the company starts buying or selling holiday as part of a flexible benefits package, and it also matters for part-time staff.  How much is a day's work worth?

I'm going to ignore any consideration of how much it might cost or benefit the company to offer flexible benefits.  If there needs to be an administration charge, that's fine, but that should be made clear.  What I am concerned about is the raw price that should be attached to a day's work, which should be the basic price that should be charged for buying or selling days of holiday (buying a day's holiday is the same as selling a day's work, and vice versa).  I'm also going to ignore things like pension contributions and tax - I'm just considering the basic salary.

My argument goes against UK employment practice.  But I am right and UK employment practice is wrong!  UK employment practice says that a day's pay is the annual salary divided by 260, which is the number of weekdays in a typical year (actually it's more likely to be 261 and can sometimes be 262, but we can put that to one side for now).  My argument is that a day's pay should be the annual salary divided by the number of days the employee actually works for that salary.  How many days is that?  From 260 weekdays, we subtract 8 bank holidays (royal weddings excepted!) which brings us down to 252 days.  And if the employee has 25 days' paid holiday, the total number of actual working days comes down to 227.

The UK norm is usually justified by saying that because bank holidays and annual leave are both "paid" then those days should count in the calculations.  That is fine when an employee works for the full 227 days.  But suppose an employee would like to buy some more holiday from the company (or take unpaid leave - it's the same thing).  With the UK norm, she would pay 1/260 salary per day, which seems OK until you look at what happens when she buys more and more days.  Suppose the company were very flexible and allowed her to buy enough holiday to take the whole year off.  To do that, she would need to buy 227 days, which would cost 227/260 of her salary.  She would be left with 33/260, or 12.7%, of her salary for doing no work at all!  Why does this happen?  It's because as her number of actual working days decreases, she continues to be entitled to 25 days' (paid) holiday and 8 (paid) bank holidays.  What should happen is that as she works fewer days, her paid holiday entitlement should also go down.  This is what we normally do with part-time staff.  In a company where full-timers get 25 days' holiday, someone who works 3 days a week will normally be given 3/5 x 25 = 15 days, and there will normally be some kind of arrangement to deal with bank holidays as well.  A full-timer buying holiday should be treated in exactly the same way as a part-timer.  If she is not, then the system is unfair to part-timers.

With my approach, a day's holiday should be valued at 1/227 salary.  Our mythical year-long holidaymaker would then pay 227/227, or all of her salary for the privilege, which is as it should be.  And for more realistic amounts of holiday, the employee will be treated exactly the same as a part-timer working the same number of days.

It might be argued that using 1/227 contradicts the principle of paid holiday, since this holiday is not part of the 227 days.  But in fact it's the other way round.  1/227 salary for each working day includes the money paid for the correct proportion of annual holiday, so as the employee buys holiday, part of what she pays goes to buy back the annual holiday she should be losing as her working year gets shorter.

If the employee sells holiday, the same rate of 1/227 should also be used, because by working for more days the employee is effectively earning more paid holiday.  The difference between 1/227 and 1/260 is 12.7% (the same as the proportion of holidays to weekdays) which is quite a serious amount.  Giving an employee 1/260 for extra days of work is equivalent to paying time minus 12.7% for overtime - not a good deal!