Do contractors get holiday pay?

It’s a topical time for umbrella companies.

Yesterday, a ruling was released by the First-tier Tribunal, specifying that ‘mini-umbrella companies’ (not to be confused with bonafide umbrella companies), are not permitted to use the VAT Flat Rate Scheme, or claim the Employment Allowance.

The topical, and the timeless…

And on Thursday coming (April 18th 2024), the government has said it will use Tax Administration and Maintenace Day to update the umbrella company market – and that includes contractors in IT and other sectors – on its plans to regulate umbrella companies.

But here, exclusively for Free-Work, I want to answer one of the more age-old questions which contractors tend to ask about umbrella companies, writes Shelley Ankers-Wainwright, of SAW Consulting. And that’s ‘Do Contractors Get Holiday Pay?’

A bit like sick pay, you generally won’t get holiday pay if you freelance

Well, generally speaking, one of the drawbacks of being self-employed is the lack of employee benefits, such as holiday pay. (N.B. It’s the same for sick pay which I’ll come onto on Friday for Free-Work).

This lack of holiday/sick pay provision leads to many small business owners including contractors and freelancers, working long hours and not taking regular time off.

But depending on your employment status, you may be entitled to holiday pay.

Qualify as a ‘worker’ or ‘employee’? Then you’re eligible for holiday pay…

Some self-employed people, including contractors and freelancers, could be entitled to holiday pay if they are classed as a ‘worker’ or ‘employee.’

And you may very well be classed as a ‘worker’ or ‘employee’ if you work through a recruitment agency or an umbrella company.

Before I dive into the technical detail of holiday pay, it's important to take time off regardless of whether you can access holiday pay as part of your work, status or structure.

Regular time off is important for your health and wellbeing. It also makes you much more of an intellectual force to be reckoned with, due to the mental recharging which a holiday provides!

Are the self-employed entitled to holiday pay?

Whether you (as a person who works for themself) is entitled to holiday pay, depends on the way you work, and the type of contract you have with the people you work for.

A huge benefit of being self-employed is of course the freedom – the ability to choose who to work for and when to work. If you work in this way, i.e. genuinely running your contracting operation as a stand-alone, bonafide business and operate a limited company (a Personal Service Company), you’re classed as self-employed, legally.

You’ll therefore have very few employment rights, which means no holiday pay entitlement.

But some contractors and freelancers might be classed as workers or employees depending on their contract and the way they work.

What do ‘workers’ and ‘employees’ look like?

In these cases, they’re entitled to holiday pay. Let’s take a look at these two key groups.

Workers – unlike self-employed people who are contracted to provide services for a customer or client, ‘workers’ are people contracted to do work personally for a company. Workers can include casual workers, agency workers and some freelance workers. Your contract will determine your employment status. Workers are entitled to holiday pay.

Employees – while many individuals in the IT sector might not be ‘employees’ in the traditional sense with a conventional 9-to-5, they often offer their services through a recruitment agency or umbrella company. And if that’s the case, they are an employee of the agency or umbrella company and are therefore entitled to holiday pay.

What’s my employment status?

It’s important to know your employment status to understand whether you’re eligible for holiday pay.

Check your contract if you are unsure -- or speak to whoever pays you to get the definitive answer about your own individual holiday pay eligibility.

Holiday pay and holiday leave should be discussed with you at the start of the contract, particularly if you’re using an umbrella company (in which case you’re an employee of the umbrella company). But if holiday pay didn’t get a mention, make sure you are asking the right questions, to the right person at your agency or umbrella, to understand what you are entitled to.

So how much holiday pay do contractors get?

You’ve looked at your contract and the way you work, and you think you are entitled to holiday pay! So, what are you entitled to?

Workers and employees get a minimum of 5.6 weeks' holiday entitlement.

This means most people who work five days a week should get at least 28 days paid leave . Be aware, this period will usually include bank holidays.

Calculating holiday pay isn’t straightforward. It’s based on the hours you work and how you’re paid for the hours.

How to calculate contractor holiday pay…

Agencies and umbrella companies will generally calculate holiday pay at 12.07 per cent of your hourly rate. This figure is based on 5.6 weeks (holiday entitlement) divided by the weeks left over in the year (which is 46.4 weeks).

Holiday pay should be clearly noted on your payslip, and you’ll receive holiday pay either when you take time off or on a ‘rolled-up’ basis, which means every time you get paid, on a weekly or monthly basis.

Google, Ask, and also online - HMRC’s handy holiday pay calculator

A quick Google Web search will reveal that one of the contentious areas when being paid via an umbrella company is holiday pay.

So be sure to check you are receiving the holiday pay you are entitled to.

Finally, when you come to leave an umbrella company, make sure you ask them if they have any outstanding holiday pay owed to you.

If you need further help with how much holiday pay you’re entitled to, you can find a handy holiday pay calculator on HMRC’s website. https://www.gov.uk/calculate-your-holiday-entitlement. Happy holiday pay, potentially!