EMPLOYMENT BULLETIN 1: HOLIDAY PAY
Many businesses are understandably still quite confused about how to treat holiday pay
with regard to additional payments which employees may be entitled to receive in the form
of overtime or commission. Over the last year we received three key decisions on this
subject, two from the Employment Appeals Tribunal (EAT) and the other from the Court of
Justice of the European Court (CJEU).
One case before the EAT dealt with overtime, the case before the CJEU dealt with
commission payments and a subsequent decision by the EAT confirmed that UK law must
conform with the decision made by the CJEU.
As is often the case in such circumstances we were not given complete answers to the
problem, we do at least have some guidance in both areas.
Looking at overtime, the EAT guidance is quite clear and is as follows; when calculating
holiday pay employers should include normal non-guaranteed overtime. This is overtime,
which is not contractually guaranteed, but which the employee is obliged to work if it is
offered or required by the employer.
Many businesses were worried about how far back such claims for overtime may be allowed
to go and the judgment was clear that in normal circumstances any claim for underpayment
of holiday would need to be brought within three months. In practical terms and when
calculating holiday pay you should review the previous three months employment and take
the average amount of overtime paid to include in any holiday pay. It is also important to
note that such overtime payments only apply to the four week statutory holiday element of
an employees’ holiday pay per year. Any additional holiday does not need to include
overtime.
The decisions regarding commission payments were less clear, the EAT decision this year
confirmed that UK businesses should include commission payments when calculating
holiday pay for employees’ whose pay usually includes commission. Where we are
struggling is that we have received no guidance from either court regarding how any such
holiday pay should be calculated.
Interpreting the decision on commission in conjunction with that on overtime, it would
appear that businesses should generally include commission in holiday and use a similar
mechanism as for overtime, i.e. consider the previous three months earnings and pay
holiday pay on the average over those three months.
Where business has real difficulty is where different commission schemes are in place or if
holiday periods have already been calculated or considered when setting targets for
commission. Commission schemes vary considerably and these decisions have not provided
any guidance in relation to annual commission nor did any of the cases address other
rewards such as discretionary bonus’ and whether or not they will need to be considered
when calculating holiday pay.
Unfortunately the CJEU has left it for future national courts or tribunals to decide the
specific detail on the calculation. In the meantime you are safest calculating holiday pay
using the previous three months earnings including overtime and commission and using the
average amount as the base for holiday pay.