Calculating Holiday Pay

STOP PRESS Commission Payments and Holiday Pay
British Gas has now appealed to the Employment Appeal Tribunal against the decision of the Employment Tribunal set out below  that employers must take into account commission payments when calculating pay for the four week holiday entitlement under regulation 13 of the Working Time Regulations. If British Gas is successful in its appeal, it is possible that commission payments of the type received by Mr Lock will be treated differently to overtime and may not have to be included in holiday pay.

In (Lock v British Gas Trading Ltd) the ECJ  ruled that commission must be factored into holiday pay with regards to 4 weeks leave. This wording has now been added to the UK’s Working Time Regulations.

What had not been confirmed is the appropriate reference period for that calculation, so until that decision is made the general view is that using a reference period of 12 weeks is likely to be appropriate. It will also depend on the frequency of commission payments and it is easy to see that where commission is paid less regularly, a 12 week period may not work. Employers will have to make a judgement call about the right reference period based on the facts of their particular commission arrangements until further guidance is given.

What overtime should be included?
Certain overtime should now be included into average salary for holiday pay and calculated only on the 4 weeks’ annual leave entitlement.

Guaranteed overtime
Guaranteed overtime is where the employer is obliged by the contract of employment to offer and pay for agreed overtime.
Workers should have their normal guaranteed overtime taken into account when they are being paid annual leave.
Non-guaranteed overtime
Non-guaranteed overtime is where there is no obligation by the employer to offer overtime but if they do then the worker is obliged by the contract of employment to work overtime.
Workers should have their normal non-guaranteed overtime taken into account when they are being paid annual leave.
NB Following an Employment Appeal Tribunal decision that holiday pay should now include non-guaranteed overtime in relation to 4 weeks holiday pay, this decision is binding on the Tribunal but is subject to any appeals – although no appeals have been lodged to date.
Voluntary Overtime
Voluntary overtime is where the employer asks the worker to work overtime and the worker is free to turn down the request as there is no contractual obligation on either side to offer or refuse overtime. There is currently no case law to suggest that voluntary overtime needs to be taken into account when calculating holiday pay.

How to calculate average pay
An employee’s pay whilst they are on holiday – and when they leave – will be calculated to reflect their average pay over the previous 12 week period. In addition, employers will need to review the records for the past year and where there is not a 3 month gap between holidays and make retrospective top up payments
Holiday pay and sickness
When a worker takes paid or unpaid sick leave, their annual leave continues to accrue. If the worker is unable to take their annual leave in their current leave year because of sickness, they should be allowed to carry that annual leave over until they are able to take it, or they can choose to take a period of annual leave while they are sick and be paid at their usual annual leave rate.
Once again an employee’s pay whilst they are on holiday – and when they leave – will be calculated to reflect their average pay over the previous 12 week period
The Government has recently introduced the Deduction from Wages (Limitation) Regulations 2014 which will come into effect on 1 July 2015. After that date, all unauthorised deductions from wages claims – including claims for underpaid holiday pay – that are started will be limited to deductions or underpayments suffered by the employee within the previous two years.
If you would like more information on calculating holiday pay, please do get in touch.


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