Calculating staff holiday pay? Don’t get burnt!

How much to pay an employee whilst they are on holiday has undergone some changes in the past few months. Despite a number of key cases making their way through the legal system in the UK and some clarification from the European Court of Justice, employers have been left scratching their heads about what must be paid to employees when they are on holiday. Here are the key changes that will effect employers.

For holiday purposes, “normal remuneration” should include sales commission payments (Lockv British Gas Trading Ltd – [2014] IRLR 648) and, following the decision of the Employment Appeal Tribunal (EAT) last November, compulsory non-guaranteed overtime (Bear Scotland Ltd and others v Fulton and others[2015] IRLR 15).

Set out below are the key points you need to know about what “normal remuneration” actually means.

1. Some employees haven’t been paid as much as they should have been when they have been absent from work on holiday. This typically applies to employees who receive commission, fixed bonuses and/or overtime as part of their regular employment. Those who are only paid a salary should be unaffected.
2. Employees who are paid non-guaranteed overtime should be paid holiday according to a 12-week reference period, allowing for an average to be taken over that period. This might not be ideal for businesses where there are different calculation periods already in place (such as monthly payroll), and seasonal peaks and troughs. It also means that calculating the correct rate can be laborious and time-consuming.
3. New Government Regulations impose a two year limitation period on unlawful deductions from wages claims submitted on or after 1 July 2015. This means that claims for holiday pay, as well as bonuses, fees and other payments will be limited.
4. Not all is resolved. We now know that commission should be included in the payment of holiday pay, but how that calculation is made has not yet been determined. For now, employers may choose to work under the assumption that the 12-week reference period, as used for overtime calculations, may be used. However, this does not address annual fixed-bonuses or where there is a contractual period between accruing commission and when payment falls due.
5. It is still uncertain how ‘non-guaranteed overtime’ will be interpreted and if voluntary overtime and other payments (such as discretionary bonuses) should be included in holiday pay.

For now, the law in this area may still be in flux, but employers can be more certain in planning for the future. It is clear that holiday pay is not limited to basic pay and employees who are paid commission, overtime or fixed bonuses will be entitled to have that taken into account. How those calculations are made may still be unclear, but consistency of treatment and acting in the ‘spirit’ of the recent case law will be important factors when assessing any claims, should they arise.