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. 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.
As numerous recent cases show the actual legal principles upon which the holiday pay issue is based are complex and new case law is still emerging and appeals on going. 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.
The issue of calculating holiday pay has been problematic for some time.
Under the Working Time Regulations 1998 all employers should calculate holiday pay based on an average weekly wage which includes any extra payments for Sunday working, not just on normal hours.
Employees are all entitled to a week’s normal holiday pay in respect of each week of their statutory 5.6 weeks’ (or 28 days’) holiday entitlement. A week’s pay is either:
- The normal rate of weekly pay, if the employee’s hours or pay does not vary, or
- The average remuneration over the previous 12 weeks if the employee’s hours or remuneration varies.
- Only the 4 weeks’ annual leave entitlement under the original Working Time Directive are covered by this judgment, rather than the full 5.6 weeks’ leave provided by the Regulations as they operate in Great Britain.
However, what is normal weekly pay and average remuneration? The position is clear if there is just a basic salary to take into account. There are a number of cases which deal with the issue of overtime payment and holiday pay, but there has been significant uncertainty as to whether overtime should always be taken into account when calculating a week’s holiday pay.
Elements of employee pay
When calculating employee holiday pay it is well established that the following elements should be included:
- Contractual overtime – the Employment Rights Act 1996 says that pay for a working week includes basic pay and overtime if this is contractual.
- Contractual bonuses or commission or shift-work – if an employee’s hours and pay vary perhaps because of bonuses or commission or shift-work then the average hourly rate over the preceding 12 weeks takes into account the extra payments.
When calculating employee holiday pay it is established that the following elements should probably be excluded:
- Discretionary bonuses – bonuses which are definitely not contractual are excluded.
Salary sacrifice’ schemes – any salary that is sacrificed through such a scheme (e.g. childcare vouchers) may be excluded.
- Pensions, cars, or health cover – a week’s pay will generally not include benefits such as these items.
Recently, case law has confused matters by suggesting that all overtime both contractual and non-contractual should be included when calculating holiday pay. This includes the following:
- Compulsory overtime – overtime that an employer can require the employee to do in addition to normal working hours.
- Guaranteed overtime – overtime that an employee is contractually entitled to receive, and is required to do.
- Regular non-guaranteed overtime – overtime the employee does regularly, but the employer is not obliged to provide it.
- Voluntary overtime – overtime that the employer does not have to offer and which the employee does not have to do (the clear trend in the case law is that voluntary overtime which is regularly worked is normal pay upon which holiday pay should be based).
Key points for employers to note include:
- 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.
- 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.
- In the Lock case the ECJ said that a specific analysis of holiday pay is required to determine what should be paid for a period of leave. In that case, the commission fluctuated from month to month, but was permanent enough to form a normal part of salary.
- 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.
- Whatever happens, 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 may wish to wait until the Lock appeal before proceeding further.
- 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.
- The case law does not yet fully address what happens if a 12 week reference period does not reflect what the employee would normally earn.
- Some employers may be able to prove that their commission scheme already compensates for holidays.
- Voluntary overtime which is regularly worked by employees should probably be included when calculating holiday pay.