Scandinavium #11: The funny math of "holiday pay"

{861 words, 1 figure, 4 minutes}

Note: I wrote this in June but had to work and travel significantly so the post is chronologically out of context.

The month of June means a big paycheck and some last minute work before most of Norway disappears from the workplace to vacation for most of July. By law, Norwegian workers have the right to three weeks of uninterrupted holiday during July, and given the long winter, I can't fault the Norwegians for really partying hard in the summer. We even got snow in May and it's still not quite T-shirt weather in June, particularly in the breezy evenings. Besides the long July vacation, there's a burst of music festivals, city festivals (Lillestrøm's byfesten was just last week), and barbecuing and grilling out at every opportunity.

When I consider the five weeks of vacation that Norwegians get and that three of those weeks are basically required in July, the Norwegians basically get the same two weeks' fully flexible vacation that most American workers seem to get. For any kind of work dependent on others, July is nearly an impossible month to be productive. (Note: for collaborative work with France, which takes the month of August off, it's basically two months of idleness). Some Norwegian employers even force their employees to take the month off, likely to save on operating costs and for safety. Likewise, our labs are shutting down for July and part of August as is the JEEP-II nuclear reactor. For some more independent workers, though, it can mean higher productivity due to the lack of interruptions.

The big paycheck is a result of what is called "holiday pay", which uses some interesting mathematical gymnastics I had to study before I understood. At IFE, I get 1% of my annual pay each month stored as holiday pay. Each June, I get the holiday pay stored from last year. So if I worked 12 months last year, I get 12% of annual pay added to June. I actually worked five months last year, so I got 5% of my annual salary. This is in the payslip as “Utbet.FP ord. i ferieå”, if you need help figuring it out like I did. In Norway, the minimum is 10.2% but worker unions may negotiate to higher amount, like 12% at IFE.

I then subtract pay for each holiday I take this year. Typically, that is 25 days. So I take my average daily pay and multiply by 25. Alternatively, take annual pay, divide by 52 weeks then multiply by 5 (whole weeks of holiday). That is what is shown in the payslip as “Ferietrekk ordinært”. The first column is number of holidays taken. The second column is base pay per day. The third column is the product of these two. Let's call this the anti-bonus. It is subtracted from income.

The income tax I pay (Tabelltrekk) is based on my base pay minus the anti-bonus, minus the pension contribution, rounded to nearest kroner. The holiday pay is not factored into the tax calculation.

Try to run this math on your payslip and see if it the numbers work out correctly. As for why the math is this way, I think it means you don’t get normal pay during holidays so it is subtracted as the anti-bonus. And then you get paid 12% of your annual income from last year as a bonus in June. So how does that come out exactly? Well, you lose 25 days or 5 weeks' of regular pay. That's [annual salary]*[5 weeks/52 weeks] or 5/52 = 9.62% of your annual salary compared to 12% as replacement pay. But not only that, it's tax-free.

In fact, since 5/52 (0.096) is greater than 1/12 (0.083), a worker would technically have no taxable income since it would all be deducted. Without a paystub of this situation, I can't verify this, but theory would say that a worker would instead get 12% of their annual salary tax-free [Edit: this is actually true in the example provided by University of Oslo, which is a reference I used]. Assuming a worker at my income tax bracket of 35%, one month's gross salary of 8.33% of annual salary is cut down to 5.42% of annual salary. At 12% of annual salary tax-free instead, it's a whopping 2.22 times the normal month's net salary. That's a big paycheck.

As for me, having worked 5 months last year and starting after July 1st, I get 10 days' deducted (3.85% lost) and 5% of my annual salary as holiday pay. With less tax, I netted about 2.70% of my annual income (1.15% without tax savings, a difference of 1.55%). Compared to my average monthly pay, it turns out to be a 48.8% bigger paycheck (after tax!). Had I started before July 1st, I would have gotten the full benefit. What a funny way to pay holiday bonuses in Norway; but I won't argue with the extra money (2.70% is 15,140 kr, nearly $2,000 USD!). Plus this comes the same month as my recent trip reimbursement and my Norwegian tax return (which was over $1,000 USD thanks to a new resident deduction), so this has been a very rich month.

As we would say in the U.S., happy holidays! And to all the Norwegians on their vacations now: god sommerferie!

And here's the other side of the 200 kr note from the front page: