Up until now, employers have calculated holiday pay on basic pay, recent rulings now mean that regular commission, overtime payments and work related travel must be included as part of the calculation. Where employees have variable pay structures, the following should be taken into consideration when calculating holiday pay:

Commission – an additional payment usually made to an employee as a result of sales – must be used to calculate holiday pay for the 4 weeks of statutory annual leave required under European law. There is no requirement to do this for the additional 1.6 weeks of statutory annual leave (including bank holidays) provided under UK law or any additional holiday an employer may provide.

Unfortunately, there is no legal guidance on how holiday pay should be calculated or whether employees can make backdated claims, so further guidance is expected from the Government this year. In the meantime, employers should start to implement this in a sensible manner.

Overtime Payments – Guaranteed and non-guaranteed overtime must also be included when calculating holiday payments regardless of whether it is undertaken on a consistent or irregular basis. Guaranteed and non-guaranteed overtime can be defined as follows:

Guaranteed overtime is contractual overtime, and the terms of the contract expressly state that the employer is obliged to offer overtime and pay for it. Non-guaranteed overtime is where there is no contractual obligation on the employer to offer overtime; however, where overtime is made available, the employee must, in line with their contract of employment, work the overtime.

As with commission calculations, overtime holiday calculation should be based on the European Working Time Directive of 4 weeks and not the UK Regulation of 5.6 weeks. A two year cap has been placed on claims; therefore, any employees seeking to make a claim against an employer for unlawful deduction of wages can only claim for a maximum of two years.

An initial ruling last week, has suggested that individuals who work voluntary overtime regularly i.e. where there is no contractual obligation for overtime to be offered to an employee and there is no obligation to accept it, may also be eligible for overtime to be included in holiday pay. However, there was no guidance given on what ‘regularly’ may mean and it is likely that we will have to wait for forthcoming tribunal cases for this. In the meantime, it is recommended that employers review any employees who regularly work voluntary overtime and start to budget for this to be incorporated into their holiday pay in the near future.

Work-related Travel – Pay for work-related travel which is usually defined as travel associated with work excluding the normal commute to and from the employee’s base, must be taken into consideration when calculating holiday pay.

Next steps

It is advisable that employers review their terms and conditions of employment as well any additional payment that are made to staff in order to determine whether it is necessary to recalculate holiday payments. Failure to re-evaluate how holiday pay is calculated may leave businesses at risk of Tribunal claims.

For assistance please contact Anita Wynne at Beststart HR on awynne@beststarthr.com or Tel: 01438 747 747.