Important Update To Holiday Pay Calculations

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You will probably have heard a fair bit recently in the press regarding some legal cases that have centred on holiday pay and its calculation.

We have set out below some detail to help employers understand what has changed and, particularly, what they need to consider and do.

Holiday pay has typically been calculated on basic salary only. In cases where there are no regular pattern of working hours (e.g. for zero hours contracts), then the calculation has been as an average of all remuneration received in the previous 12 weeks.

The recent court cases have focused on whether overtime should be included as part of the calculation for holiday pay. The reasoning is that an employee should not be deterred from taking holiday because they will suffer a financial detriment from being away from the workplace. For example, a car salesperson would not be able to earn commission when on holiday, away from the car showroom. Accordingly, commission needs to be taken into account when calculating holiday pay for those workers entitled to it.

Whilst this is a fairly straightforward concept to understand, a similar methodology needs to be applied to employees who receive overtime payments as part of their contracts of employment. In situations where overtime is compulsory and/or guaranteed, then its value should be included in the holiday pay calculation. Where overtime is of a voluntary nature, but it offered and taken as part of a regular working pattern (e.g. at month end to get certain pieces of work done and can be reasonably forecast), then that too should be included. Whilst inclusion of voluntary overtime should be considered on a case by case basis, only the sort of overtime that can genuinely be worked or declined by the employee should be excluded for the purpose of holiday pay calculations.

Employers need to be aware that these provisions only apply to the first 20 days of holiday in each year. For those employers whose holiday year commences in January, the first 20 days of employee holidays, including Bank Holidays, must include the additional payments, as set out below.

Employers should ensure the following items are included in holiday pay calculations:-
  1. Commission payments – for “settled and regular” commission and /or incentives;
  2. Overtime that is compulsory for employees to carry out, irrespective of whether it is guaranteed;
  3. Payments that related to the “personal and professional status” of an employee, such as those based on seniority, length of service or professional qualifications;
  4. Productivity/performance bonuses;
  5. Shift allowances and premia;
  6. Standby payments and payments for emergency call outs;
  7. Travel and other allowances that are treated as taxable remuneration.
It is very important that employers take the time to carefully check their position in respect of holiday pay, ensuring they are fully aware of what to include in their calculations.

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