Should employers take commission, overtime, bonuses and extra allowances into account when calculating holiday pay?

Posted on Nov.24, 2016 by in Latest News

Yes, employers must take into account commission, overtime, bonuses and extra allowances when calculating holiday pay. From a practical point of view most employers should assume that many of the extra payments they regularly make to employees must be included when working out the appropriate amount of holiday pay.

Assuming employees are given 28 days holiday the extra elements only have to be included when working out twenty days of the employees holiday pay. The remaining eight days holiday (which is derived from UK rather than EU legislation) does not have to take these extra payments into account in the same way.

Employees bringing holiday pay claims in the employment tribunal on or after 1 July 2015 cannot claim unpaid wages for more than two years.

As numerous recent cases show the actual legal principles upon which the holiday pay issue is based are complex. New case law is still emerging and appeals ongoing. However in the meantime, employers should review their existing holiday pay arrangements to ensure extra payments are included in holiday payments so that any risk from holiday pay claims is minimised.

Certain issues have not been resolved, including what the correct reference period is for calculating commission based holiday pay and how to actually quantify the claim.

Essential points:

  • The result of the decided cases is that employers should now include additional elements of pay that are regularly received by workers when calculating holiday pay. If there is any doubt about the impact of a particular type of regular payment on holiday pay, then employers may wish to take advice.
  • If employees are regularly working overtime, it is likely that overtime is part of their normal hours and should be taken into account when calculating holiday pay.
  • How holiday pay should be calculated in fluctuating circumstances is a matter for the national courts to decide, so it is almost certain that legislation will be amended to reflect all these cases.
  • Employers should examine commission policies to see which additional payments are part of their workers’ salary, or perhaps try to vary commission structures. This will be difficult if these have become contractual, unless the employees agree to a variation.
  • It appears that going forward, aspects of pay that are ‘intrinsic’ to the performance of the work may have to be included in the calculation of holiday pay. In principle, such payments that are intrinsically linked to the performance of the job might include bonuses, commission, overtime pay (including required non-guaranteed overtime), performance-related pay, call-out supplements and anti-social hours allowances.
  • The rule that claims for unpaid holiday cannot go back more than three months is not under challenge and will remain in place. The legislation to limit any claims submitted from 1 July 2015 onwards to a maximum of 2 years’ back pay for any underpaid holiday pay will also remain in place.
  • Employers who are currently in discussions with employees’ about calculation of holiday pay can assume that it now seems increasingly certain that regular overtime should be taken into account when calculating holiday pay.
  • Voluntary overtime which is regularly worked by employees should probably be included when calculating holiday pay. Employers may want to consider how often they rely on voluntary overtime and calculate the potential liability.
  • Many employers have already addressed the issue regarding future holiday pay arrangements with employees and trade unions and in some cases past arrangements too.

Additional points:

  • Workers’ holiday pay should reflect payments that they receive for overtime for the four weeks’ annual leave to which they are entitled under EU law, but not the extra eight days holiday under the WTR. The extra eight UK holiday days which can also be expressed as 1.6 weeks’ extra holiday required under UK law and any additional contractual holiday that employers choose to provide do not therefore have to include extra payments.
  • Employers can therefore pay a higher rate of holiday pay (to include average overtime, commissions etc) for the first twenty days holiday with the remaining eight days being paid at a level not including the extra payments, although the employer can, of course, choose to pay the full twenty eight days at the higher level voluntarily.
  • Employers may wish to reduce non-contractual overtime and commission payments where possible, or factor in a contingency for future liability under holiday pay claims.
  • Aspects of the worker’s total remuneration that are intended only to cover costs when performing the task do not have to be included in the calculation of holiday pay.
  • Radius allowances and travelling-time payments do fall within the definition of ‘normal remuneration’ when calculating holiday pay. However expenses ancillary to travel such as a fares are not included.
  • Employers should consider calculating the average annual amount of commission received by a worker and using this to calculate holiday pay. Averaging a previous month’s or year’s commission could be used to determine an appropriate holiday pay. Alternatively employers may base their calculations on workers’ average earnings in the 12 weeks leading up to their holiday. The 12-week reference period is just based on current law, but whether this is the correct reference period in this case will be decided on a later date.

To discuss any of these points with an independent financial adviser, please contact us.

Generation FS

Generation FS