How To Calculate Holiday Pay When Staff Receive Overtime And Commission Payments - More Than Accountants

How To Calculate Holiday Pay When Staff Receive Overtime And Commission Payments

Computing the amount of holiday pay for an employee or worker seems to be a simple process. However, due to several court decisions that were made ever since 2014, there were a lot of changes that were implemented. Now, there are already a lot of things that employers should consider when computing holiday pay, commission schemes as well as overtime arrangements.

What Are The Things That You Need To Consider When Computing Holiday Pay?

Basically, holiday pay will depend on the worker’s week’s pay. If you are working on shifts or you don’t have regular working hours, then your holiday pay will be computed based on your previous twelve months pay. But in February 2019, the government made some changes to the reference period of calculating the holiday pay. It will now be determined based on 52 weeks from April 6, 2020.

Previously, a week’s pay is calculated based on the interpretation of a working week according to the Employment Rights Act 1996. It states that a working week is comprised of basic pay as well as any overtime stated in your employment contract which requires you to work since it is compulsory.

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But currently, holiday pay will also incorporate other payments such as guaranteed pay if it is compulsory overtime and contractual pay if the commission is results-based but may not be applicable in any other type of commission. There is also a non-guaranteed pay, this means that if it is regularly worked then it is compulsory overtime but it might be unclear if it is irregular overtime. It will also include voluntary overtime payments in case this happens regularly.

Although it could possibly include performance bonuses most probably contractual bonuses but not discretionary bonuses. It is also possible that this can include some allowances such as travelling time payments, travel allowances, as well as standby and on-call allowances which are considered as part of the regular remuneration.

On the other hand, holiday pay will exclude payments for benefits in kind including cars, pension, and health cover. It will also not include wages that are sacrificed such as a salary sacrifice scheme, for instance, for childcare vouchers.

What Does Overtime Mean?

Essentially, overtime refers to any hours which employees worked over and above their regular contractual working hours, Nevertheless, there are various types of overtime. These are guaranteed overtime, non-guaranteed overtime, voluntary overtime as well as compulsory overtime. Guaranteed overtime is when the employer is obligated to offer overtime. But with non-guaranteed overtime employers are not obliged to offer overtime. Voluntary overtime is somewhat different since employees are not required to do any overtime yet they can choose to accept it if they want to. And lastly, compulsory overtime is when employees are required to render overtime offered by their employer.

So, What Should Employers Do Now When Calculating Holiday Pay?

Now, employers have to incorporate regular commission and regular overtime in calculating holiday pay. Or else they are at risk of illegal deduction from wages which your employees might file against your company. Most especially that right now workers, employees, and claimants can file a case to the Employment Tribunal without any fees.

Key Case Studies

Neal v Freightliner Ltd 2013

According to the judge, all overtime must be included in the computation of holiday pay, whether it is voluntary, compulsory, contractual, non-contractual, as well as any other shift premiums. This decision is not restrictive since there was no appeal however there was a settlement outside the Court instead.

Lock v British Gas 2014

In 2016, the Court of Appeal decided that the Working Time Regulations 1998 can be paraphrased to incorporate the contractual results-based commission when calculating holiday pay. The court made a decision that in computing Mr Lock’s holiday pay, it must be based on his average regular pay that included income from his commission.

Nevertheless, this can only be applied during the first four weeks or 20 days of annual leave. However, not the extra eight days that is provided in the UK or any other contractual holiday privilege that an employer should provide to its staff.

Hertel (UK) Ltd v Wood; Bear Scotland Ltd v Fulton; Amec Group Ltd v Law 2014

All of these cases were heard by the Employment Appeal Tribunal (EAT). The claimants in these cases have successfully established in their Employment Tribunals that their employers should have included normal but non-contractual overtime when computing their holiday pay.

The EAT acknowledged this and stated that regular, non-guaranteed overtime must be included when computing holiday pay. Take note that employers do not offer non-guaranteed overtime to their employees but when this is offered, employees must work on it.

White v Others v Dudley Metropolitan Borough Council 2016

According to the judge voluntary overtime, voluntary call-out, and voluntary standby payments must be considered as regular pay when undertaken with adequate normality, hence will be used in the computation of holiday pay.

Dudley Council made an appeal and in August 2017, the EAT decided that voluntary overtime was regular where it is being paid over an adequate period of time regularly. The EAT also discovered that payments that are made for a number of years using the rate of one week and paid every four to five weeks were adequately normal. But this can still be appealed.

In this particular case, the EAT also made an endorsement that a 12-week reference period will be applied when calculating holidays.

Flowers v East of England Ambulance Trust 2017

In this case, the ET decided that the compulsory overtime rendered by the ambulance workers which are associated with their shifts must be incorporated in the computation of the holiday pay. Although this is not guaranteed overtime yet it needs to be accomplished since it was an important requirement of their job. Hence, it must be included when computing holiday pay.

The Court of Appeal supported the EAT decision in July 2019. Furthermore, they revealed that voluntary overtime payments must be reflected in holiday pay, provided that those payments are considered as normal pay. This case is something that should be seriously considered by the private sector since it has the same decision as to the Dudley Council v Willetts. In March 2020, the Supreme Court permitted the East of England Ambulance Service NHS Trust to make an appeal to the Court of Appeal’s ruling.

King v Sash Window Workshop Ltd (SWWL)

In this particular case, we are reminded that the new holiday pay rules do not only cover employees bur workers as well. For 13 years, Mr King was working as a salesman and was paid on a commission basis only. However, he was never paid when he took a holiday since SWWL regarded him as self-employed. In 2012, Mr King became 65 and his employment was terminated. But fortunately, he was able to claim his holiday pay at an Employment Tribunal since he was actually a worker.

This case has been passed around from the Court of Appeal, the EAT, the European Court of Justice (ECJ) then it was returned back to the UK Court of Appeal. Based on the decision of the ECJ, a worker must be paid for his accumulated leave for the entire period that he was entitled to holiday yet he was not given the chance to take it. Obviously, he could not take it since he will not be paid for it. There should not be any limitation on time.

The case was scheduled to return to the UK Court of Appeal so the ECJ’s decision can be implemented, also to compute the compensation owed to King, however, the case has been settled outside of Court before the scheduled hearing.

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