Should you, as an employer, include overtime, commission and bonuses in your employee’s holiday pay?

The current law on statutory holiday pay is quite straightforward in the sense that every employee is entitled to at least 4 weeks of annual leave and 1.6 weeks of additional leave (8 public holidays per year).

However, where it can get a little tricky is working out what is covered in additional holiday pay. More so, how is it calculated and how do you avoid getting caught out by backdated claims, in case you’re not paying enough holiday to your employees? If you offer bonuses, commission and overtime, should these also be factored into holiday pay?

Here at Simplify ER, it is fundamentally important to us that we protect your rights and help you understand the law around additional holiday pay. So, the first question to ask yourself as an employer is:

“Are your employees being paid less than what they would normally get if they were at work?”

If the answer is yes, then you would probably need to look at how your holiday pay is calculated. Why is this? Because employees are entitled to take what is regarded as their regular pay, and they should not be worse off when using their holiday.

So, let’s dig in a bit deeper and discuss how you can protect yourself as an employer, should the law become more definitive on paying the right amount of holiday pay to your employees.

Are regular commissions included in holiday pay?

If you pay regular commission as part of the employee’s monthly pay and their earnings would be adversely affected if they took annual leave, then that should be considered when calculating their holiday pay.

If the commission is sporadic and irregular, then you can argue that you don’t need to include it in the holiday pay because the employee would not be worse off if they took the annual leave.

When calculating holiday pay, should you consider overtime that is not regular or required?

If you are not paying regular overtime and it is not expected in your employee’s monthly pay packet, then it can be argued that the employee won’t be deterred from taking holiday pay, as they won’t be worse off financially. It is difficult to work out what ‘regular’ means regarding overtime, so it’s best to work on the notion that if the overtime is expected by the employee, then it should be factored into holiday pay.

Is voluntary overtime included in holiday pay?

While compulsory regular overtime should be included in holiday pay, voluntary overtime, if frequent enough, should be expected as ‘normal pay’.  It doesn’t matter whether the overtime was volunteered on not, the overtime work extends for a sufficient period on a recurring basis and, thus, should be factored into holiday pay.

Is the employee entitled to their bonus payments during their holiday pay?

You would need to review the remuneration arrangements in your employee’s contract to determine the kind of bonuses you offer your employees, as productivity, attendance and performance bonuses that are intrinsically linked to the performance of your employee’s tasks should be included in holiday pay calculations. Discretionary, one-off and company performance bonuses, however, are more open to argument. But, the rule of thumb again is to work out whether an employee would be worse off if they took their holiday.

How is holiday pay calculated?

Holiday pay is calculated based on the employee’s average weekly wage if their hours/pay is not varied. If the employee works sporadic or seasonal hours, then holiday pay will be worked out from a period of weeks that is most representative of their average salary – this is generally a 12-week period.

What should you do now?

Until the law becomes more definitive on what should be paid into holiday pay, there are three options available for you right now.

Option 1

You can sit tight, do nothing right now, and wait for the law to guide you on your next steps. Remember that you are potentially opening yourself up for backdated claims in the future if you are not currently paying the right amount of holiday.

Option 2

Analyse your financial risks in the event of a claim being made, which would include how your employee’s holiday is calculated, the average commission they have earned in one year, and anything else that you think would be appropriate to consider at this stage, regarding overtime and bonuses as well.

Option 3

Do a complete audit on your contracts and any commission, overtime and bonus policies that relate to calculating holiday pay and see if you can vary their structures or prepare to pay extra on top of statutory annual leave. This option may prove difficult if these policies are contractual unless you can get the employee to agree to vary the terms in their agreement. This will leave you with the option to make the changes to protect you from potential backdated claims.

At Simplify ER, we can review your contracts for you and help you work out the right amount of holiday pay to your employees, should you wish to go for options 2 and 3.

Please do not hesitate to contact us on 020 3011 0448 or send us an email to info@simplifyer.co.uk. We can advise you on your next steps and ensure that you will not be caught out by the new legal changes to holiday pay.

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