How to calculate holiday pay? Key rules and examples

This article answers the following questions:

• Which remuneration components are excluded from the holiday pay calculation basis?
• What period should be taken into account when calculating the basis for holiday pay?
• Is a length-of-service allowance included in the basis for calculating holiday pay?

In Poland, annual leave is guaranteed by the Labour Code whenever an employment relationship has been established. The regulations clearly provide that an employer is obliged to ensure that an employee taking annual leave receives the same remuneration they would have earned had they been performing their duties as normal. Unfortunately, calculating such payments is straightforward only in theory. In everyday practice, various solutions used by businesses, for example to make their remuneration systems more attractive, cannot always be easily translated into the context of annual leave.

How, then, should employers approach the remuneration of employees who are using their annual leave entitlement if, in addition to a fixed monthly salary, they also receive bonuses, functional allowances or overtime pay? To answer this question, it is worth examining not only the key principles but also specific real-life examples.

Labour Code and the guarantee of holiday pay

Pursuant to Article 172 of the Labour Code, an employee is entitled, for the duration of annual leave, to the remuneration they would have received had they been working during that period. This is a guaranteed benefit that protects employees from a reduction in income in the month in which they exercise their right to rest.

Polish legislation therefore imposes an obligation on employers to calculate remuneration in such a way that it reflects an employee's actual earnings. This means that if an employee's remuneration consists solely of a fixed monthly salary, payroll and HR specialists should have no difficulty whatsoever in paying remuneration for annual leave. In such circumstances, the employee's salary remains unchanged. The challenge arises only when an employee receives additional variable remuneration components (for example bonuses). In these cases, appropriate calculations must be carried out on the basis of the employee's average remuneration from the period immediately preceding the leave.

How to determine the basis for an employee's holiday pay?

The key to correctly calculating and paying remuneration for annual leave is the proper determination of the basis used for its calculation. Under the Regulation of the Minister of Labour and Social Policy of 8 January 1997, employers must divide remuneration components into two main categories: fixed components and variable components.

Fixed remuneration components

Remuneration components specified in a fixed monthly amount agreed between the employer and the employee should be included in holiday pay at the amount due to the employee in the month in which the leave is taken.

Therefore, if an employee earns a basic salary of PLN 5,000 gross and receives a fixed functional allowance of PLN 500, the amount payable during annual leave remains unchanged. The employer pays PLN 5,500 because fixed amounts do not require any additional holiday pay calculations.

Variable remuneration components

Variable remuneration components are characterised by the fact that their amount is not guaranteed for each payroll period and depends, for example, on work performance or the results achieved by an employee during a given settlement period.

Where such additional remuneration is payable for periods not exceeding one month, particular attention must be paid when calculating holiday pay. HR and payroll departments should focus in particular on:

• variable performance-related bonuses,
• remuneration for overtime worked,
• night-work allowances,
• sales commissions.

To ensure that the payment is fair and objective, Polish regulations require employers to take these components into account at the total amount paid to the employee during the three calendar months preceding the month in which the leave begins (although it should be remembered that, where these components fluctuate significantly, the reference period may be extended to as much as 12 months). What matters here is the month in which the remuneration was paid, rather than, as is the case when determining the basis for sickness benefits, the month for which the remuneration was due.

Components excluded from the basis used to calculate holiday pay

Not all elements of remuneration form part of the holiday pay basis. The regulations clearly state that, when calculating employment-related benefits, HR and payroll departments should exclude:

• one-off or non-periodic payments awarded for the completion of a specific task or achievement,
• remuneration for periods of readiness to work and periods of downtime for reasons beyond the employee's control,
• long-service awards,
• remuneration for other justified absences from work and for annual leave itself,
• cash equivalents for untaken annual leave,
• remuneration for periods of incapacity for work due to illness,
• retirement and disability severance payments,
• discretionary bonuses that do not constitute an enforceable entitlement.

When does the holiday pay calculation require the adjustment of the calculation basis?

When determining the holiday pay basis that includes variable remuneration components, it should be borne in mind that an employee may not have worked throughout the three months preceding the month in which the leave begins (for example due to sickness absence or another absence).

In such a situation, those responsible for payroll calculations must establish the remuneration actually earned by the employee during that period and divide it by the number of working days for which it was payable. This enables HR professionals to determine an average rate, which is then used to calculate remuneration for annual leave.

If, throughout the entire period adopted for determining the holiday pay basis, the employee was not entitled to any variable remuneration, the employer should use the nearest earlier months in which such remuneration was payable. This principle applies where an employee did not receive monthly variable remuneration due to absence from work, for example as a result of annual leave or illness.

Calculating holiday pay step by step

Once the fixed components and the qualifying variable components have been identified and the basis determined, the employer proceeds to calculate holiday pay. The process consists of three steps:

• Step 1: Add together the variable remuneration components from the three months preceding the month in which the leave is taken.
• Step 2: Divide this total by the number of hours actually worked by the employee during the three-month period considered in Step 1 (this produces the hourly rate).
• Step 3: Multiply the resulting hourly rate by the number of hours the employee would have worked during the leave period under their normal working schedule.

Examples of holiday pay calculations

Having discussed the entire process and its individual stages, let us now move on to practical examples. What situations are commonly encountered by RSM Poland experts providing HR and payroll outsourcing services?

Example 1: Holiday pay and fixed remuneration components

An employer engages a full-time employee in a senior position who receives a fixed basic salary of PLN 8,000 gross. In August, the employee takes ten days of annual leave, corresponding to 80 working hours.  

Since the employee's remuneration is fixed, the HR and payroll department does not need to make any additional calculations. At the end of August, the employee receives their full remuneration of PLN 8,000 gross because the leave period is fully covered by the fixed monthly salary.

Example 2: Fixed salary and variable bonuses

A full-time employee working in the sales department receives a fixed salary of PLN 6,000 gross and, in addition, a monthly performance-related bonus whose amount depends on sales results. The employee takes five days of annual leave in May, corresponding to 40 working hours.

During the three months preceding the leave month (February, March and April), the employee worked a total of 504 hours and received the following bonuses:

• February: PLN 1,200,
• March: PLN 900,
• April: PLN 1,500.

This means that, in order to calculate holiday pay correctly on the basis of average remuneration, it is necessary to:

1. add together the bonuses from the three months preceding the leave (PLN 1,200 + PLN 900 + PLN 1,500 = PLN 3,600); 
2. divide the resulting amount by the number of hours worked (PLN 3,600 ÷ 504 hours = PLN 7.14 per hour);
3. multiply the resulting hourly rate by the number of leave hours in May (PLN 7.14 × 40 hours = PLN 285.60).

As a result, the employee's total remuneration for May will amount to PLN 6,000 gross as fixed salary plus PLN 285.60 attributable to variable remuneration components during annual leave (and, naturally, they may additionally receive a bonus for sales results achieved during the remaining working days in May).

Correctly calculating holiday pay is not always straightforward

It should not be forgotten that proper holiday pay calculations are not merely a legal requirement but also have a direct impact on employee morale. Fairness, accuracy and diligence in payroll and HR processes therefore protect businesses both against claims and sanctions from supervisory authorities and against internal tensions or even the loss of qualified personnel. After all, annual leave should primarily be an opportunity for relaxation, so it is important to implement professionally designed procedures and transparent payment rules that allow employees to enjoy their time off without concerns about their household finances.

Employers should also bear in mind that managing remuneration for employees in Poland, particularly within organisations with complex structures or unusual remuneration systems, can be time-consuming. For this reason, it is always worth considering support from an experienced outsourcing provider. RSM Poland's HR and payroll team helps clients not only streamline processes and standardise settlements but also implement appropriately regulated incentive schemes and solutions that enable effective and legally compliant human capital management. 

If you have any questions regarding remuneration policies, we warmly encourage you to get in touch. Together, we can ensure that your HR and payroll processes are fully compliant and prepared for future business challenges.