We are now entering the most common period for summer vacation and payment of holiday pay. Questions often arise about determining vacation and what payments the employer should take into account when calculating the basis for holiday pay.
In this article, we provide answers to some frequently asked questions about vacation scheduling and holiday pay calculation.
The right and obligation of holiday for an employee
According to the Holidays Act, all employees are entitled to annual leave of 25 working days (including Saturdays), which equals 4 weeks and 1 day. Although this is the legal minimum, many employees actually have five weeks of vacation. The fifth week of vacation is either a collectively agreed arrangement, based on an individual agreement between the employee and employer, or included as a general administrative policy within the employer's organization.
It is commonly stated that employees have the right and obligation to take vacation. Every employee has the right to vacation regardless of whether they have earned holiday pay. Furthermore, all employees are obligated to take vacation each year. In principle, there is no legal possibility to waive the right to vacation. However, there are some exceptions: Firstly, an employee may refuse to take vacation if they have not earned enough holiday pay to cover their loss of income during the vacation period. This is typically relevant for newly hired employees who have not worked in the company long enough to accrue full holiday pay.
Who decides when the vacation should be taken?
The employer must discuss with the employees well in advance of the vacation period to determine when the vacation should be taken. If no agreement is reached between the parties, the employer has the final decision-making authority. However, employees have the right to demand that their main vacation period (18 working days) be scheduled during the main vacation period, which is from June 1st to September 30th. Additionally, employees can request that their remaining vacation days (7 working days) be scheduled together within the holiday year. The employer must inform the employees of when the vacation will be taken as early as possible and no later than 2 months before the vacation starts.
What is holiday pay?
Holiday pay is intended to compensate for the employee's loss of income during the vacation period. Holiday pay is calculated based on all remuneration the employee has received in the previous calendar year. When fully accrued, the employee should be ensured approximately the same income during the vacation as throughout the year.
What payments are included in the holiday pay basis?
Starting point
Holiday pay is intended to replace the employees' loss of income during the vacation. Holiday pay is calculated based on all remuneration paid to the employee during the accrual year, which is the previous calendar year. "Remuneration" includes all forms of compensation that the employee has earned as a result of their work, such as monthly salary, various allowances and bonuses, overtime, etc.
Payments relating to coverage of expenses for cars, board and lodging, or the value of goods, services or other benefits that are not monetary benefits (with the exception of the value of full or partial board received as part of the remuneration for work) are not included. The same applies to holiday pay pursuant to the Act that has been paid in the accrual year. Holiday pay that is not linked to the statutory holiday of 4 weeks and 1 day is normally included in the calculation basis, unless otherwise specifically agreed between the employee and employer.
The Holiday Act specifies the minimum rules for what is included in the holiday pay basis. Employees are entitled to holiday pay corresponding to 10.2% of their holiday pay basis. In businesses where employees are entitled to five weeks of vacation, it is common to pay 12% of the holiday pay basis to cover the loss of wages for the extra vacation days.
Special mention of bonuses in the holiday pay basis
There are various types of bonus schemes, and it is not always easy to determine whether a bonus should be included in the calculation of the holiday pay basis or not. However, the Holiday Act provides several exceptions regarding benefits that should be included in the holiday pay basis. These exceptions can help determine whether a particular type of bonus should be included or not. Additionally, it is important to remember that holiday pay should be calculated based on the employee's work effort.
Firstly, the "share of net dividend" should not be included in the calculation basis. This exception applies when the entire net profit of the enterprise is distributed. However, if the bonus is dependent on the size of the enterprise's profit, this exception will not apply.
Secondly, the "fixed remuneration earned and paid irrespective of absence on holiday" should not be included in the calculation basis. For a bonus to be included in this exception, it must be a fixed amount paid regardless of holiday absence. This means that variable payments influenced by the employee's individual results will be included in the calculation basis. For example, bonuses based on "achieved sales figures" are directly linked to the employee's performance and are considered as work remuneration that forms the basis for holiday pay.
It may be more uncertain whether discretionary bonuses based on the company's or department's results should be included in the holiday pay basis. Based on legal precedents, it appears that this type of bonus should also be included as long as the results can be attributed to some extent to the employee's own contribution to the enterprise. The existence of a sufficient connection between the employee's efforts and the company's results depends on a specific assessment.
Signing bonuses or "completion bonuses" generally should not be included in the calculation basis. This type of bonus is often solely tied to the condition that the employee remains in the position for a certain period, without any expectations regarding the actual work performed. However, in such cases, a specific assessment must also be made. If these bonuses, at least partially, can be linked to expectations regarding the employee's work effort, that portion should be included in the calculation basis. It is wise to consider this before introducing a bonus, and a good piece of advice is often to deduct 12% and pay it as holiday pay the following year. This way, the employer avoids the risk of unexpected expenses of 12% in the subsequent year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.