With the changes in legislation and a number of court cases on holiday pay, employers must ensure holiday pay is calculated correctly. In the long running case of Lock v British Gas Trading Ltd it was ruled holiday pay must include compensation for any results based commission that would ordinarily be earned.
This case is important to any employer running a commission scheme, or one which regularly makes other payments in addition to a worker’s basic salary that are intrinsic to the job role such as overtime or stand-by payments. Cases like these serve to highlight employees are entitled to receive the same salary when taking annual leave as they receive whilst at work.
All types of overtime, including voluntary overtime, must be included when calculating a worker's statutory holiday pay entitlement with the exception of overtime only worked on a genuinely occasional and infrequent basis.
Commission, overtime and work-related travel may also need to be factored into statutory holiday pay calculations. A worker’s entitlement to holiday pay will continue to accrue during sick leave and family leave.
There are different rules for calculating holiday pay depending on the working patterns involved. Workers must take their statutory paid annual leave allowance and can only be 'paid in lieu' for this when their employment ends.
What is meant by holiday pay?
In general, workers should receive the same pay when taking annual leave as they normally receive while they are at work. This principle only applies to the 4 weeks of annual leave required by the EU Working Time Directive. All workers also receive a further 1.6 weeks of annual leave required by UK law, and some receive additional amounts as a part of their contracts too.
Many employers choose to apply the judgments to this extra annual leave. Doing this is not a legal requirement but can help to keep processes simple and understandable.
Underpayment claims are limited to a maximum of 2 years
Claims for backdated holiday pay deductions made on or after 1st July 2015 are subject to a two year cap set out by The Deduction from Wages (Limitation) Regulations 2014.
Commission is typically salary payments to workers for making sales and can make up some or all of their earnings, if they are not paid a basic salary. Results based commission must be factored into holiday payments for the 4 weeks of statutory annual leave required under European law. There is no requirement to do this for the additional 1.6 weeks of statutory annual leave provided under UK law, or for any additional contractual annual leave allowance.
This was confirmed on 22 May 2014 by the European Court of Justice in the Lock v British Gas case.
Work-related travel can have a number of different meanings but for most employment matters, this typically means any travel made for work purposes that is not a part of a workers commute to their usual place of work. On 4 November 2014 the Employment Appeal Tribunal issued a judgment in a case joined to Bear Scotland v Fulton which covers how holiday pay should be calculated in relation to work-related travel.
Where payments are made for time spent travelling to and from work as part of a worker's normal pay, these may need to be considered when calculating holiday pay.
Holiday pay and sickness
When a worker takes paid or unpaid sick leave, their annual leave will continue to accrue. If a worker is unable to take their annual leave in their current leave year because of sickness, they should be allowed to carry that annual leave over until they are able to take it, or they may choose to specify a period where they are sick but still wish to be paid annual leave at their usual annual leave rate.
Calculating holiday pay for different working patterns
It doesn’t matter what the working pattern is, a worker should still receive holiday pay based on a 'week's normal remuneration'. This usually means their weekly wage but may include allowances or commission.
For workers with fixed working hours, holiday pay would be a week's normal remuneration.
For workers without normal working hours their holiday pay would still be a week's normal remuneration but the week's pay is usually calculated by working out the average pay received over the previous 12 weeks payments.
For shift workers a week's holiday pay is usually calculated by working out the average number of hours worked in the previous 12 weeks at their average hourly rate.
Payment in lieu of holidays
While workers are in employment, 5.6 weeks of their annual leave (this is the amount all UK workers are statutorily entitled to) must be taken and cannot be 'paid off'. Anything above the statutory allowance may be paid in lieu but this would depend on the terms of the contract.
When a worker's employment is terminated, all outstanding holiday pay that has been accrued but not taken (including the statutory allowance) must be paid.
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