Workers in the UK are entitled to 28 days a year paid holiday (which can include Public Holidays), if they work full time for five days a week. Part-time workers a re entitled to the same level of holiday pro rata. Self-employed workers are not entitled to any annual leave. If you leave your job with holiday leave still yet to use, your employer should pay this back to you.

How is holiday pay calculated?

Up until recently, the UK government has advised that employers use basic pay when calculating how much a worker should receive whilst they are on holiday. This was defined in the Working Time Regulations Act of 1998 and means that, historically, commission and overtime have not been included when calculating holiday pay.

However, on 12 June, a new ruling on holiday pay came into force, with new guidelines relating to overtime and commission. Employees who work in sales roles and earn a commission based salary are most affected by this, and also set to gain now these new guidelines are in place.

So what’s the case for overtime?

Over the past year, there have been several key decisions made by the Employment Appeals Tribunals (EAT) on the subject of overtime. The guidelines for overtime indicate that employers should include normal non-guaranteed overtime when calculating holiday pay. Whilst not contractually agreed, this overtime would include any case in which the employee is obliged to work if it is offered or required by the employer.

What about backdated claims?

Understandably, many employers are concerned as to how far back claims for overtime may be allowed. Although not legally binding, the guidelines state that any claim made for underpayment of overtime should not exceed a three month period. Therefore, employers should review the 12 weeks of employment immediately preceding the holiday period and work out an average amount of overtime pay to be included in any holiday pay.

European law states that full time workers are entitled to 20 days’ paid holiday, but in the UK it stands at 28 days.  However, employers should note that enhanced holiday payments (your basic pay plus any overtime and/or sales commission) will normally only apply to the first 20 days – in accordance with European law.  The subsequent eight days are determined by UK law and are not affected by European legislation.  Additional contractual leave over and above 28 days is also not affected by European rulings.

If you are unsure what holiday pay you’re entitled to, speak to your employer about its policy.

What are the guidelines for commission?

It has been stated that employers should now also include commission payments when calculating holiday entitlement for employees whose pay is commission based. However, the guideline in terms of calculating it is less clear. Generally, it is advisable that employers should adopt a similar method for commission as they do for overtime, that is, to consider the three previous months of earnings and calculate an average to use for holiday pay. However, one difficulty lies in the fact that commission schemes vary considerably and will therefore complicate how holiday rates will be calculated.

Finally, what’s the case for bonuses?

Although the case for commission has been made, there have been no clear guidelines in relation to other rewards, such as discretionary bonuses. The case for whether or not bonuses should be considered when calculating holiday pay is yet to be considered and it will remain for national courts and tribunals in the future to decide.

What should employers do now?

Technically, now the ruling has been made, employers should immediately begin to factor in overtime and commission into holiday pay, using the guidelines provided. On a practical level, employers and HR departments should be communicating with payroll providers and determining whether current payroll systems are able to process this update in calculations. Workers contracts and handbooks should also be updated clarifying any changes.

Clearly, one of the biggest challenges facing businesses is any potential claims made by employees in terms of remuneration for lost holiday pay. Therefore, it may be beneficial for employers to calculate the maximum liability for all employees in order to be best prepared for any financial loss incurred as a result.

Author: Derek Dawson

Paul Crowley and Co Solicitors

DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. This article is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered in this article, please speak to Paul Crowley and Co Solicitors directly.