How to calculate Holiday Pay: with or without commission?
Following a series of recent cases about Holiday pay the issue of commission has been returned from Europe to the local Tribunal to decide whether commission needs to be added to holiday pay.
UK laws governing the right to paid holiday in the most part originate from European Law. The Working Time Directive sets out that all member states must ensure that workers (that is both employees and ‘workers’) have the right to paid holiday. The Working Time Directive states that workers must have at least 4 weeks’ holiday but it does not set out how this will be paid.
European Law regarding holidays has been incorporated into UK legislation by the Working Time Regulations. These Regulations set out how holiday entitlement works in practice in the UK. The rules regarding how holiday is taken, what notice must be given etc. are contained in the Regulations.
Workers in the UK have the right to 5.6 weeks’ holiday rather than the minimum 4 weeks set out by Europe. Any time taken for holiday is to be paid at the rate of a week’s pay for each week of leave, which is calculated in accordance with provisions of the Employment Rights Act 1996.
Within the Employment Rights Act guidance is given on how to calculate a week’s pay for those people who have ‘normal working hours’ and those with ‘no normal working hours’.
Those employees who have normal working hours will generally have a standard rate of pay each week and therefore their ‘weeks’ pay’ is calculated with reference to their hours.
If an employee does not have normal working hours their week’s pay is calculated using their average weekly pay over the last 12 weeks. By the nature of the calculation this normally includes all pay received by the employee including overtime pay, bonuses and commission.
In this case the employee Mr Lock worked normal hours each week for British Gas Trading Limited as an internal energy sales consultant. His pay did not vary with the amount of work he did and he received the same basic salary each month. For the purposes of the Employment Rights Act the calculation of his pay for holiday purposes would fall under the ‘normal working hours’ calculation.
Mr Lock did however receive commission on sales and this commission made up approximately 60% of his pay. The commission was paid in arrears to Mr Lock and therefore it was paid sometimes several weeks or months after the sale had been completed.
When Mr Lock went on holiday he would receive his basic salary as normal plus commission from any prior sales that fell due. However, because he was not generating any sales when on holiday, he would return to work and then in the following months have a reduced income because of the lack of sales during his holiday time.
Mr Lock brought a claim in the Employment Tribunal arguing that the European Court of Justice had stated in previous cases that holiday pay should reflect the actual income an employee would receive if they were at work.
There was a clear conflict in this case between what the law regarding the calculation of a ‘week’s pay’ in the Employment Rights Act and what the European Courts were saying, therefore the Employment Tribunal referred the case to the European Court of Justice for a preliminary ruling.
The European Court decided that commission payments must be taken into account when calculating holiday pay for the purposes of the Working Time Directive.
The case then returned to the Employment Tribunal who had to decide how to deal with the apparent conflict between UK legislation and the requirements of European law. The result was that the Tribunal decided that it was necessary to add to the Working Time Regulations to incorporate commission in the calculation of a week’s pay for holiday pay.
This means that the week’s pay provisions of the Employment Rights Act 1996 should be re-written and shall apply ‘as if, in the case of the entitlement under Regulation 13, a worker with normal working hours whose remuneration includes commission or similar payment shall be deemed to have remuneration which varies with the amount of work done for the purpose of section 221’.
Points to Note
The decision in this case and in other recent cases regarding the calculation of holiday pay means that you must now include commission and certain overtime payments in the payment made for holiday pay, rather than just paying basic pay when an employee is on holiday.
It should be noted that this decision only applies to the 4 weeks holiday which is set out as the minimum by European Law. The additional holiday which was introduced by the UK government to include allowance for the 8 public and bank holidays is not affected by the Tribunal’s decision in this case, and therefore can, at the moment, be paid using a different calculation for holiday pay.
You may decide that to avoid administrative issues and the scope for things going wrong that you adjust your calculation for all holidays.
An alternative way to reduce the costs and administrative burden could be to review how you calculate pay over the year and make wholesale changes to contract terms to counter the additional cost for holiday pay. If you decide that you want to go down this route then I strongly recommend that you seek advice before making changes.
Holiday pay and entitlement is a notoriously difficult area to manage and with recent changes introduced by case law it is important to stay on top of what employees and workers are entitled to. If you subscribe to the HR Harbour Portal there is a whole area for the administration of holiday which makes life much simpler. If you would like more information have a look at this brochure HR Harbour Brochure