How should I calculate holiday pay?

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Commission and overtime payments should, according to recent tribunal cases, be included in holiday pay. The legal application of these cases can be complicated but our analysis here will give you the most up to date considerations for working out how much to pay your workers when they take annual leave.

Commission

Particularly of note to retail and sales employers, the Employment Appeal Tribunal recently decided in British Gas Trading v Lock that where workers earn commission, these payments should be reflected in holiday pay. This would have the effect of increasing holiday pay because employers would have to take an average of pay earned, including commission.

 So do I have to start reflecting commission in my workers’ holiday pay?  Not for now, no. Whilst it is important to be aware of this judgment, the employer involved has appealed it and so it will be heard by the Court of Appeal in July. It’s worth waiting to see what the Court of Appeal says before jumping the gun and making changes that may not be necessary.

Non-guaranteed Overtime

A couple of years ago, the Employment Appeal Tribunal decided in Bear Scotland v Fulton that payments for non-guaranteed overtime should also be included in holiday pay, where the overtime is a ‘normal’ element of working hours. Non-guaranteed overtime is overtime which the worker is required by his contract to do if and when it is provided by the employer, but there is no obligation on the employer to provide it.

So should I start reflecting non-guaranteed overtime in my workers’ holiday pay? The employer involved did not appeal this judgment meaning it cannot now be overturned so employers may be wise to consider increasing holiday pay in this regard where the circumstances match those in this particular case. However, this principle only applies to the first 4 weeks of annual leave taken in the leave year (“relevant holidays”); the rest can still be paid at basic pay. Workers can claim for unpaid holiday pay reaching back 2 years, but back pay liability can be restricted if there has been a gap of 3 months between “underpaid” relevant holidays.

Voluntary Overtime

Within the last few weeks, the Employment Tribunal has decided that payment for “sufficiently regular” voluntary overtime hours should be reflected in holiday pay, in White v Dudley Metropolitan Borough Council. Voluntary overtime is overtime which the worker can choose of their own free will to accept or decline.

So do I have to start reflecting voluntary overtime in my workers’ holiday pay? No. This was a judgment by the Employment Tribunal; only when an Employment Appeal Tribunal judgment is made do employers need to think about reviewing their practices. Only if and when this happens and the judgment is not overturned should employers consider reviewing how they pay holiday pay.

Holiday pay appears to be the current hottest topic at Employment Tribunal and employers and because it is a quickly developing area of the law, employers should keep a keen eye on it in order to ensure they aren’t caught out.

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