Holiday pay: Rules, rates and payout – are you on top of it?

The payout of holiday pay is approaching. As an employer, are you prepared?
Ensuring correct payment of holiday pay to employees is an important part of holiday planning. In addition to the correct amount and timing, you need to be in control of what the holiday pay should actually be calculated from. This is where many make mistakes.

What is holiday pay – and what are the holiday pay rates?

Holiday pay compensates for the loss of salary when employees take vacation, and is calculated as a percentage of last year's paid remuneration.

These are the current holiday pay rates:

Holiday under the Holiday Act	Holiday pay rate
Employees under the age of 60	10.2%
Employees who turn 60 or are 60 during the holiday year	12.5% (10.2% + 2.3%)

Holiday under agreements
Employees under the age of 60	12%
Employees who turn 60 or are 60 during the holiday year	14.3% (12% + 2.3%)

Holiday pay for employees aged 60 and above

To compensate for the loss of salary during their additional week of vacation, an extra 2.3% holiday pay is granted, as mentioned.

According to the Holiday Act, employees aged 60 only earn extra holiday pay on the holiday-pay basis up to six times the National Insurance basic amount (which from 1 May 2024 is NOK 744,168). The basic amount as of 31 December in the earning year is used.

However, some employers choose to calculate the extra holiday pay on the entire holiday-pay basis, without limiting it to six times the National Insurance basic amount.

What is included in the holiday-pay basis?

According to Section 10 of the Holiday Act, holiday pay must be calculated from everything defined as remuneration for work, and which has been paid during the earning year.

Included in the calculation:

Fixed salary and hourly wages
Overtime, shift and inconvenience allowances
Bonus (based on work performance)
Commission
Tips
Dirty-work allowance
The value of full/partial free board

Not included:

Holiday pay already paid out
Free phone, car, housing (benefits in kind)
Expense allowances (e.g., per diem, mileage allowance)
Severance pay and other non–work-based benefits
Net dividends

Holiday pay and bonuses – what applies?

Many ask: Should holiday pay be calculated on bonuses?

The answer depends on whether the bonus is linked to work performance.

Yes, if the bonus is based on individual or department-based performance.

No, if the bonus is discretionary or completely unrelated to performance.

Do you want to avoid paying holiday pay on top of the bonus now? Then you can withhold the holiday pay and instead place the bonus on a pay type that generates holiday pay for the next holiday year. This is in line with the Holiday Act’s payment rules.

When must holiday pay be paid out?

According to Section 11 of the Holiday Act, holiday pay must be paid:

No later than the last payday before the holiday, or
At least 1 week before the holiday begins

Many employers choose to pay all holiday pay in June. This is permitted, as long as the salary for the relevant holiday days is deducted at the same time. This deduction is “given back” during the holiday period, ensuring employees have money to live on.

We look at the methods of paying out holiday pay:

- Hourly paid employees do not receive salary during their vacation, as no timesheets are submitted. This means it is important that holiday pay is paid for the actual vacation period, which is also the main rule in the Holiday Act.
  
  In my experience, it is quite common for employers to pay both holiday pay and regular hours from May onwards to hourly paid employees. This results in a large payout at once, but nothing in the month after the vacation has been taken.
  
  Such a practice is not recommended unless a salary deduction is made for the vacation days.
  
  If the employee takes their vacation in July, it is of course perfectly fine to pay the holiday pay for that vacation in June.
- For employees on monthly salary, it is common to pay all holiday pay once a year regardless of when the vacation is taken, typically in June.
  
  With this type of full annual settlement, all holiday pay is paid out at once, and salary is simultaneously deducted for the vacation days. This ensures that employees still receive income during their actual vacation. While this method is not fully aligned with the main rule in the Holiday Act, it is still considered acceptable because it ensures employees have money to live on while on vacation.
  
  The salary deduction for the vacation can be done in several ways. The calculation also depends on whether you use a 6-day workweek (as stated in the Holiday Act) or consider a week to be 5 days. We’ll look at both examples here.
  
  Let’s look at some scenarios.
- Holiday pay NOK 65,000
  
  June salary NOK 50,000
  
  Deduction for 25 days of holiday (NOK 2,307 × 25 days) NOK -57,675
  
  Paid out NOK 57,325
  
  The daily rate is calculated by dividing the monthly salary by 21.67 days.
  
  21.67 days is the average number of days worked per month, assuming a 5-day workweek.
  
  – 5 days per week × 52 weeks = 260 days per year
  – On average per month: 260 / 12 = 21.67 days
  
  The daily rate used above is therefore NOK 50,000 / 21.67 days = NOK 2,307 (rounded from NOK 2,307.33).
  
  Alternatively, some employers use this calculation:
  
  Holiday pay NOK 65,000
  
  Deduction in salary for 3.33 days (NOK 2,307 × 3.33 days) NOK -7,682
  
  Paid out NOK 57,318
  
  The NOK 7 difference is due to rounding.
  
  Why are 3.33 days deducted?
  For employees with 5 weeks of holiday, the total is 25 days. When you stop the June salary, you have already withheld salary for 21.67 days, so an additional 3.33 days must be deducted to withhold the full 25 days of holiday. These 3.33 days must be deducted from the holiday pay.
  
  As you can see, both methods result in the same payout. In the latter example, June salary is not paid. Therefore, 3.33 extra days must be deducted to complete the full 25-day holiday deduction.
- Holiday pay NOK 65,000
  
  June salary NOK 50,000
  
  Deduction for 30 days of holiday (NOK 1,923 × 30 days) NOK -57,690
  
  Paid out NOK 57,310
  
  The daily rate is calculated by dividing the monthly salary by 26 days.
  
  26 days is the average number of working days per month when using “working days per week” under a 6-day system.
  
  – 6 days per week × 52 weeks = 312 working days per year
  – On average per month: 312 / 12 = 26 days
  
  The daily rate used above is therefore NOK 50,000 / 26 days = NOK 1,923 (rounded from NOK 1,923.08).
  
  Alternatively, some employers use this calculation:
  
  Holiday pay NOK 65,000
  
  Deduction in salary for 4 days (NOK 1,923 × 4 days) NOK -7,692
  
  Paid out NOK 57,308
  
  The NOK 2 difference is due to rounding.
  
  Why are 4 days deducted?
  For employees with 5 weeks of holiday, the total is 25 days. When June salary is stopped, salary has already been withheld for 21 working days (based on the 6-day calculation), so an additional 4 days must be deducted to reach the full 25-day holiday deduction. These 4 days must be deducted from the holiday pay.
- Whether you calculate using 5 vacation days per week or 6 working days per week is something you must decide internally.
  
  In my experience, most employers today consider a week to consist of 5 days, and the holiday-pay settlement is typically based on that. I also believe this approach is easier for employees to understand.
  
  In addition, the method where you pay both holiday pay and salary in June and deduct the full vacation period is usually the option employees understand best.
- Employees who have accrued only a small amount of holiday pay may refuse to take their full holiday. This is important to keep in mind during holiday planning. You can read more about this in this blog article.
  
  For hourly paid employees, this resolves itself because they submit timesheets. As a general rule, they should have their holiday pay paid out during their vacation. If they take more vacation than their holiday pay covers, they simply do not receive salary for those extra days.
  
  For employees on monthly salary, it is also common to settle holiday pay for those with low accrued holiday pay in June. The difference is that their salary is deducted for fewer days, since they are not taking the full holiday entitlement.
  
  Example
  
  An employee has holiday pay sufficient to cover the loss of salary for only 3 weeks. He does not wish to take more vacation than those 3 weeks.
  
  The settlement for this employee will then be, using the same daily rate as in the earlier example:
  
  Holiday pay NOK 39,000
  June salary NOK 50,000
  Deduction for 15 days / 3 weeks of holiday (NOK 2,307 × 15 days) NOK -34,605
  Paid out NOK 54,395
  
  In this case, the employee can take 3 weeks of vacation with pay. If the employee takes more vacation than these 3 weeks, you must remember to deduct salary for those additional days.

Tax withholding on holiday pay

Holiday pay paid out in the holiday year is exempt from tax withholding. This applies to both statutory holiday pay and holiday pay under collective agreements.

The exemption also covers ongoing benefits in kind such as company car, mobile phone, loans, housing, etc.

Tax must be withheld on:

Holiday pay paid in the earning year
Holiday pay paid the year after the holiday year (when vacation days are carried over)
Additional holiday pay for employees aged 60 and over
Contractual holiday pay exceeding 12.34%

Do you have questions about holiday pay? Get in touch with us:

Tormod Johansen

Director

tormod.johansen@aider.no

+47 91 77 02 42

LinkedIn