When an employee works a set amount of hours and receives a fixed salary, working out their holiday entitlement is a relatively straightforward task.
However, calculations become a little more difficult for zero-hours staff, or when staff work overtime or receive commission or bonuses regularly.
The general rule is that employees should receive the same pay while on annual leave that they would receive if they were at work.
Employees should not be discouraged from taking annual leave because they will not receive the same remuneration.
Case law has shown that commission and bonuses may need to be taken into account when working out holiday pay.
This only applies to the first four weeks of annual leave as required by the EU Working Time Directive and not to the additional 1.6 weeks given to employees under UK law.
The case of Lock v British Gas Trading Limited [2014] demonstrates that when an employee receives a commission, this should be taken into account as well as their basic salary when calculating holiday pay.
This decision follows on from Williams and others v British Airways PLC [2011] in which the European Court of Justice clarified that any payments that are “intrinsically linked” to the performance of the employee’s normal tasks would be classed as part of their normal remuneration for holiday pay calculations.
If an employee works guaranteed or non-guaranteed overtime regularly, then this does need to be factored in when calculating their holiday pay.
Guaranteed overtime is over time that the employee is contractually obliged to receive and do.
The Employment Appeals Tribunal confirmed that regular non-guaranteed overtime (overtime that the employer does not have to offer, but when offered, the employees must work it), should be included in holiday pay.
In Bear Scotland Ltd v Fulton [2014], it was confirmed that non-contractual but regularly done overtime should be included in holiday pay calculations.
The recently decided case of Dudley Metropolitan Borough Council v Willetts [2017] confirmed that voluntary overtime should be treated the same as other forms of paid overtime and should be included in holiday pay calculations.
However, not all voluntary overtime has to be included in the holiday pay.
Ad hoc or irregular overtime does not have to be included in the calculations.
However, where it is clear that the overtime has been carried out over a sufficient period on a regularly recurring basis, so that it has become part of the employee’s normal pay, then it must be included in holiday pay calculations.
If an employee works irregular hours, their holiday pay will be calculated by averaging their pay for the previous 12 weeks including any overtime or commission payments.
If an employee is contractually entitled to a bonus, then this should be included in the holiday pay calculation.
However, if the bonus in question is discretionary, it should not be factored into any holiday pay.
If an employee receives an additional allowance, such as a travel allowance or an on-call allowance, in some cases, this may form part of their normal remuneration as such; it will need to be included in any holiday pay calculations.
What payments will be deemed to be included in an employee’s normal remuneration will ultimately be up to the Employment Tribunal.
Payments which are not consistent or are exceptional will generally not be considered to be part of an employee’s normal salary.