Holiday pay for employers—rules, calculation and payment

In 2015, an employer was ordered to pay almost NOK 280,000 because holiday pay had been paid incorrectly — in direct contradiction to the Norwegian Holiday Pay Act.

Do you know the rules well enough? Here is an overview of how holiday pay should be calculated and paid correctly in Norway so that you avoid the same mistakes.

In Norway, employees have unpaid holiday. This means that employees are not entitled to their regular salary during the holiday period — instead, their salary is withheld throughout the year, and holiday pay accrued from the previous year is paid out. Holiday pay is therefore not a supplement to the salary, but compensation for the loss of earnings that occurs when the holiday is taken.

How much the employee is entitled to depends on what was accrued the previous year — and it is important to be familiar with the rules.

Calculation of the holiday pay basis

In Norway, the holiday pay basis is calculated based on the employee's total income in the qualifying year — that is, the calendar year preceding the holiday year. The rate itself depends on the employee's compensation. The Holiday Act entitles employees under the age of 60 to 4 weeks and 1 day's holiday, with a holiday pay rate of 10.2%. If the employer has a collective agreement or contractually agreed holiday terms, better conditions often apply: 5 weeks' holiday and a rate of 12%. It is these provisions that must then be applied.

To ensure the calculation is done correctly, it is important to understand the framework set by the Holiday Act — and where it cannot be deviated from.

When should payment of holiday pay be made?

Holiday pay should be disbursed the last ordinary pay day before the holiday, and no later than one week prior to the employee’s vacation.

Note that employers can pay holiday allowance a specific month (e.g. June). In these cases, the employer must pay ordinary salary when the employee takes his or her vacation if they take holiday at any other time.

When is holiday pay disbursed when an employee leaves the company?

When an employee leaves the company, the holiday pay he or she has earned until the date they leave should be disbursed on the last day before the employee leaves.

What the Holiday Act regulates

The Holiday Act (Ferieloven) is the Norwegian legal framework governing employers' obligations regarding holidays and holiday pay. The Act regulates four key aspects:

• How holiday pay is to be calculated

• When holiday pay is to be paid

• How much holiday employees are entitled to

• When the holiday is to be taken

An important point is that, as a general rule, the Holiday Act is mandatory — in other words, it is not possible to agree on terms that are less favorable to employees than those laid down by the Act. Where a business is bound by a collective agreement, this will often grant employees better rights than the Act, and it is then the collective agreement that applies.

One area where many employers make mistakes is how commissions and bonuses should be treated in the holiday pay calculation. There are clear rules here that it is important to be aware of.

Who are entitled to holiday pay?

To be entitled to holiday pay the concerned person must be evaluated as “an employee”.

This means that self-employed contractors and freelancers are normally not entitled to receive holiday pay.

Commissions and bonuses in the holiday pay calculation

Holiday pay must be calculated on the basis of all remuneration the employee has received during the qualifying year. In practice, this means that commissions and bonuses must in most cases be included in the holiday pay basis — provided that the payments are a result of the employee's own work performance. This is a common source of error for employers, and incorrect calculation can have costly consequences. If you are unsure whether a particular payment should be included in the basis, we recommend that you seek legal advice to ensure the calculation is correct.

Another factor affecting both the calculation and the payment is the employee's age. Employees who turn 60 during the holiday year are entitled to extended holiday and a higher holiday pay rate.

See our calculator: Estimate how much an employee cost annually

Extended holiday and higher rate from the age of 60

From the calendar year in which the employee turns 60, they are entitled to an extra week's holiday in addition to the standard holiday period — in accordance with both the Holiday Act and any collective agreements. To compensate for the increased wage deduction this entails, these employees are also entitled to a higher holiday pay rate within certain limits. As an employer, it is important that you are aware of this distinction, so that neither the holiday pay basis nor the payment is incorrect for this group of employees.

Regardless of which group of employees is concerned, the consequences of incorrect calculation or payment are the same — and they can be significant. A previous precedent set by the Norwegian Court of Appeal illustrates this very clearly.

Consequences of errors in the calculation and payment of holiday pay

If holiday pay is not calculated and paid in accordance with the Holiday Act and any applicable collective agreement, the ultimate consequence for your business could be that you have to pay holiday pay again to all employees affected by the error.

Example from a court ruling:

If holiday pay is not calculated and paid in accordance with the Holiday Act and the applicable collective agreement, the consequences can be serious. In the worst-case scenario, the business risks having to pay holiday pay again to all affected employees — which can quickly become very costly.

A judgment from the Court of Appeal in December 2015 illustrates this clearly. An employer had, through the employment contract, paid holiday pay on an ongoing basis as an included part of the monthly salary. This is not accordance with the Holiday Act, which requires holiday pay to be calculated and set aside separately — and paid when the employee takes holiday, not during the qualifying year. When the employment relationship ended, the employee claimed that holiday pay for the last three years should be paid out again. The employer was ordered to pay NOK 188,659 in holiday pay, in addition to covering the employee's legal costs of NOK 89,250 — a total of nearly NOK 280,000.

The case serves as a reminder that even well-intentioned but incorrect procedures can have major financial consequences. It pays to have your affairs in order — before a dispute arises.

How to protect your business against holiday pay errors

Holiday pay may seem straightforward at first glance, but the regulations contain several pitfalls that are easy to fall into — with potentially significant financial and reputational consequences as a result. As an employer, it is therefore crucial that you have clear procedures in place for accrual, calculation and payment, and that these are in line with the Holiday Act and any collective agreements applicable to your business.

Are you unsure whether your business is handling holiday pay correctly, or would you like a review of your procedures? Download our guide for a complete overview of the rules, or contact us directly — we'll help you ensure that everything is in order.

Also read: Employment law - These are the employer's obligations