I Wonder How Overtime and Commission Impact Holiday Pay?

For most salaried workers working regular hours, holiday pay consists of their basic salary. However, where workers consistently receive additional earnings, such as commission or regular overtime payments, these elements may also need to be included in holiday pay calculations.

In this week’s article, we explore how overtime and commission affect holiday pay and examine the potential risks of failing to take these into account.

WHAT IS HOLIDAY PAY?

Under the Working Time Regulations 1998 (WTR 1998), the statutory minimum holiday entitlement for all workers is 5.6 weeks per year, which is 28 days for a full-time employee. Part-time workers are entitled to a pro-rata equivalent based on their working hours or days.

This entitlement is divided into two components: under Regulation 13 of the WTR 1998, workers are entitled to a basic leave entitlement of four weeks (20 days for full time workers), which is derived from EU law; and under Regulation 13A, an additional 1.6 weeks (8 days for full time worker) is provided under UK domestic law.

Under the WTR 1998, workers are entitled to receive their “normal remuneration” during Regulation 13 leave, as they should not be financially disincentivised from taking time off work.

OVERTIME AND COMMISSION: WHAT COUNTS AS NORMAL PAY?

As stated above, where workers consistently receive additional earnings such as commission or regular overtime payments, these elements should also be included in holiday pay calculations.

From 1 January 2024, the WTR 1998 were amended to clarify that the following elements must be included when calculating workers’ holiday pay:

• Payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged under their contract to carry out.
• Payments for professional or personal status relating to length of service, seniority or professional qualifications.
• Payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks proceeding the calculation date.

Overtime payments fall into 3 categories:

• Guaranteed compulsory overtime – Compulsory and guaranteed overtime is not technically regarded as overtime. Instead, it forms part of the worker’s normal working hours under the Employment Rights Act 1996, and is therefore included in holiday pay in respect of the full 5.6 weeks' statutory annual leave.
• Non-guaranteed overtime – This refers to overtime that a worker is obliged to work when offered, but which the employer is not contractually required to provide.
• Voluntary overtime – This refers to overtime that the employer is not obliged to offer, but if it is offered, the worker is not required to accept.

Non-guaranteed and voluntary overtime need to be included in holiday pay where they are either “intrinsically linked to the performance of tasks which a worker is obliged to carry out” or where such overtime has been “regularly paid” to the worker. There is no definitive legal threshold for when overtime is deemed “regular”- this will be a question of fact for an employment tribunal to determine - but overtime must be sufficiently frequent or recurring to be considered part of the worker’s “normal remuneration”.

However, even if the overtime is not regularly paid, it will need to be included in holiday pay if it is intrinsically linked to the performance of the worker’s duties. This is likely to include most overtime.

CALCULATING HOLIDAY PAY CORRECTLY

To calculate how much commission or overtime pay to add to a worker’s holiday pay, the employer must calculate the average amount of overtime/commission pay received by the worker during the 52-week period immediately preceding the holiday (the "relevant period").

For workers who have been employed for fewer than 52 complete weeks, the relevant period will be the number of complete weeks they have worked. Any weeks in which the worker was on sick leave, family leave, or received no remuneration are excluded from the calculation. Earlier weeks may be brought into the calculation period to reach as close to 52 weeks as possible, up to a maximum of 104 complete weeks prior to the holiday.

Additional payments, such as overtime and commission, only need to be included in holiday pay for leave taken under Regulation 13 of the WTR 1998, which covers the basic entitlement of four weeks. If employers wish to rely on this distinction, it should be clearly set out in the worker’s contract and the workplace holiday policy, which should also specify the order in which leave is taken to enable this approach to be applied in practice.

RISKS OF GETTING IT WRONG

There are a number of risks and consequences of getting holiday pay calculations wrong:

• Tribunal claims– Workers may bring claims for unlawful deduction from wages where holiday pay has been underpaid. Under the Employment Rights Act, there is currently a two-year backstop on such claims. However, earlier this year, an Employment Tribunal (ET) judge ruled that the two-year limit on unlawful deductions claims is unlawful. As this is a first instance decision, other tribunals may choose to depart from it - although they may also choose to follow it. This decision has been appealed, the outcome of which is unknown at the time of writing.
• Liability for large retrospective payments – Employers may be liable to make back payments for underpaid holiday pay covering up to two years, in line with the current statutory limit.
• Legal costs – If a worker brings a claim for unlawful deduction from wages, the employer is likely to incur legal costs in defending the claim.
• Reputational damage – Tribunal judgments are published online, meaning that involvement in a claim for unlawful deduction from wages can negatively impact an employer’s reputation, both amongst current staff and prospective workers.

BEST PRACTICES FOR EMPLOYERS

There are several steps employers can take to ensure compliance with holiday pay requirements:

• Review current holiday pay practices – Ensure your payroll systems and processes accurately reflect all relevant pay components, including overtime and commission, when calculating holiday pay.
• Review current contracts and policies – Ensure that employment contracts and policies clearly outline how overtime and commission payments are treated in relation to holiday pay.
• Training – Provide training to payroll teams and managers on the correct calculation of holiday pay, including how to factor in variable pay elements. This can help prevent errors and ensure compliance with legal requirements.

CONCLUSION

In conclusion, holiday pay must include commission and overtime where relevant as failing to do so properly can result in a tribunal claim. Employers should ensure that their payroll teams carry out precise holiday pay calculations to minimise the risk of legal challenges.

As holiday pay can be a complex area to navigate, employers should seek legal guidance if they are unsure of their obligations.

FURTHER ADVICE

If you have any queries on how overtime and commission impact holiday pay or would like assistance updating your holiday policy, our Peace of Mind Team is here to provide expert guidance. Our Document Audit Team can also assist in drafting relevant workplace policies.

Contact our Employment Team by emailing employment@warnergoodman.co.uk or calling 02380 717 717.

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