The summer holiday season is nearly here, with all that entails for employers. Calculating holiday pay can be a bit tricky, especially given recent rulings on commission and overtime. In this article we summarise some of the key points of holiday leave and holiday pay.
Holiday leave entitlement
To start with: all employees whether full time, part time or casual are entitled to holiday pay from the first day of their employment. Full time employees are, by law, entitled to 28 days’ annual leave a year. Part time and casual employees are entitled to the same amount of paid annual leave as permanent employees but on a pro rata basis.
The employer may, of course, offer more than the statutory entitlement and this should be set out in a written contract of employment. There’s a useful holiday entitlement calculator to work out your statutory entitlement on the official GOV.UK website.
Of course, a legal entitlement to annual leave doesn’t mean that an employee has a right to take time off as soon as they start work. Leave entitlement is accrued from the day an employee starts their job at a rate of 1/12th of their annual entitlement for each full month worked (rounded up to the nearest half day).
Some employers allow employees to carry over some unused holiday entitlement to the next annual leave year. Most employers are keen that staff use their holidays – for both reasons of good management and simply because it’s good to take a break. In either case, all aspects of holiday leave should be sent out in an employment contract. It makes sense to do so even if only the statutory minimum is on offer.
Holiday entitlement continues to accrue even when an employee is absent from work e.g. off sick, on maternity, paternity or adoption leave.
Calculating Holiday Pay
Holiday pay has to include an employees’ basic rate of pay and must also take into account:
- overtime (both guaranteed and, in some cases, non-guaranteed)
- commission
- work-related travel.
Where an employee’s hours and pay varies then holiday pay should be calculated based on the average paid over the previous 12 weeks.
The recent rulings on the inclusion of commission and overtime in holiday pay applies only the the 4 weeks’ annual leave provided by European law. UK workers are entitled to more than the 4 weeks’ annual leave. Nevertheless, employers may end up paying the ‘enhanced’ rate of holiday pay (including commission and overtime components) given the difficulties of managing and calculating two different pay rates.
Commission
The European Court of Justice ruling in Lock v British Gas Trading Ltd (and subsequent appeal in the UK Employment Appeal Tribunal) means that employers now have to factor in commission as well as overtime for the statutory 4 weeks annual leave provided under European law. This is a recent change (the appeal case only having been dismissed earlier this year), so there are no clear guidelines on exactly how to calculate the commission component. To further muddy the waters, there may yet be further appeals on the inclusion of commission in holiday pay.
Overtime
If an employee works guaranteed overtime i.e. overtime that is part of the contract then this must be taken into account when calculating holiday pay. Non-guaranteed overtime, where the employer is not obliged to offer overtime but the employee must work it when offered, may need to be taken into account if worked on a regular basis.
There has not been any recent ruling on voluntary overtime i.e. overtime that the employer is not obliged to offer it nor the employee obliged to accept. So, there is no clear requirement for overtime that is purely voluntary to be taken into account when calculating holiday pay.
Getting Legal Advice
The new requirement to include overtime and commission in holiday pay can be difficult, particularly for small businesses who use overtime and/or pay commission to their sales force. It makes sense to seek expert advice if you’re unsure about how to calculate holiday pay.
A solicitor who specialises in employment law can advise you. There are also a range of websites and advisory services who may be able to help. ACAS is a good starting point and they also operate a free helpline.
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