Holiday pay – where are we now?

Colin Godfrey, Senior Associate at Veale Wasbrough Vizards LLP joins us on our blog this month to update you on the latest about holiday pay.

The vexed issue of holiday pay continues to rear its ugly head. No longer simply a calculation based on a worker’s basic salary, the issue of what to include in holiday pay continues to make this an often confusing area of employment law.

So where are we now?

The starting point is that holiday pay should be calculated in accordance with normal pay. So what happens where workers receive variable pay, for example recruitment consultants who work overtime, receive commissions on their placements or are entitled to bonuses and allowances?

Commission

As a general rule, commission payments should be included in normal pay for the purposes of calculating holiday pay. This is because commission is normally intrinsically linked to the performance of tasks required under the contract.

In the case of Lock v British Gas, Mr Lock’s average monthly take-home pay comprised basic pay and commission. The European Court of Justice found that even though the commission fluctuated from month to month, it was permanent enough to be regarded as part of Mr Lock’s normal pay and so should have been included in the calculation of his holiday pay.

Overtime

Where overtime is compulsory (i.e. where a worker is required to work it when asked) and ‘sufficiently regular’ then this should be included in holiday pay.

What is ‘sufficiently regular’ is unclear, but there is a difference between employees who work in addition to their basic hours every week, which is likely to be sufficiently regular, and those who work the odd extra hour from time to time over the course of a year.

Some uncertainty remains over whether purely voluntary overtime should be included in holiday pay calculations. This is likely to come down to whether a sufficiently regular and settled pattern has been established over a period of time.

Allowances

Allowances (excluding expenses incurred) which amount to additional taxable remuneration, should be included in a calculation of holiday pay.

Bonuses

It is currently unclear whether bonuses should be factored in to calculations of holiday pay. It is likely to come down to how closely linked the bonuses are to the hours worked by the employee. Expect to see further developments in this area!

Best practice

To help to understand and mitigate the risks for your business, consider these steps:

• • Analyse your commission structures to understand whether commission should be included in holiday pay calculations
  • Consider whether commission schemes can be restructured so commission is not intrinsically linked to the performance of tasks under the contract
  • Look at staff working patterns and payment structures to understand whether staff are earning overtime/bonuses/allowances, and whether those payments should be included in holiday pay calculations
  • Understand the potential cost of including additional payments in holiday pay calculations going forward
  • Consider whether your payroll system has the capacity to deal with potential changes in calculating holiday pay.By taking these initial steps, recruitment businesses can gain a clearer picture of the issue and what action is needed going forward.