Calculating Holiday Pay - proposed changes

Changes are proposed to the way holiday pay is calculated

In December 2016 the Lock v British Gas case was upheld at the Employment Appeal Tribunal with regard to the requirement to pay commission to staff whose salary includes commission pay, when they are on holiday. This supports the earlier Fulton v Bear Scotland case where mandatory overtime has also to be included. Following that, a further ruling from the EAT confirmed that voluntary overtime that is 'normally' worked must also be included in the holiday pay calculation. 'Normally worked' means that the overtime must have been paid on a regular basis over a period of time. If overtime is not usually paid, or is exceptional, it will not have to be included in the calculation.

The one thing that employers were asking for was guidance on the reference period over which the average should be calculated. Some clients are using the recommended 12 week average, which is used for calculating pay and holiday for employees working on zero or flexible hours. The downside of this with overtime is that it may encourage staff to work a lot of extra hours prior to a holiday period to gain even higher pay while they are away. One of our clients has decided to average holiday pay for overtime using the previous 12 months salary prior to the new holiday year commencing and another client is doing the same for commission and bonus pay. Although this may cost them slightly more in the long term, it does even the payments out across the year and will discourage staff from working a lot of extra hours prior to a holiday. It also saves a significant amount of administration time as the holiday payment element does not have to be calculated for each separate period of holiday. Our view was that, without any guidance to the contrary, calculating it over 12 months would make life a lot easier for everyone concerned.

It would appear that the Government has had the same thought and it is proposed this year that the guidance will change to extend the current guidance from 12 weeks to 52 weeks. This new guidance will be introduced into legislation as part of the Government's response to the Taylor Review of Modern Working Practices and it is expected that this will take place some time during 2019. For employers whose holiday year starts on 1 April 2019, you may want to think about making this change in readiness for your new holiday year if you are not already using 12 months as your calculation.

If you believe that you will be paying more for people to be on holiday than at work, once their overtime has been averaged, one tip is to think of giving some overtime as time off in lieu, rather than simply paying it. It may mean people have more time off work but that may be the cheaper option for you.

Don't forget that the period over which you have to average commission and overtime currently is only the first 20 days of holiday entitlement (for a full time member of staff). As this is a European ruling the requirement to average only covers the 20 days that the original Working Time Regulations introduced. For many of our clients this too is an administrative headache so they are choosing to include all holiday entitlement in their calculations. It may be that the legislation includes all 28 statutory days when it comes into being.