Business clinic: What is included in holiday pay?

Holiday pay can be a complicated area for employers. If you have employees who regularly receive commission or overtime as part of their salary, should that be taken into account when calculating their holiday pay?

Peter-ByrneBy Peter Byrne, partner and head of employment at Forbes Solicitors.

A recent European Court of Justice (ECJ) decision clarified the situation relating to commission and holiday pay. In the case of British Gas v Lock, Mr Lock was a salesman receiving basic pay and commission in relation to sales he made.

When Mr Lock took annual leave he was unable to make sales and therefore generate commission, the knock on effect was that he suffered financially as a result of taking holiday.

The ECJ decided that a worker taking leave is paid by reference to commission payments that they would have earned if they were at work.

Rather unhelpfully no further guidelines were set as to how the calculation should be undertaken. One suggestion could be to work this out on an average basis for the twelve weeks prior to the date of leave.

A similar decision was made by The Employment Tribunal in relation to overtime in the case of Neil v Freightliner. In addition to his contracted hours Mr Neil worked regular overtime but his employers paid him holiday pay based upon his contracted hours only.

The Tribunal stated that his employers were wrong to do this and confirmed that, when calculating his holiday pay, Mr Neal was entitled to have other components taken into account, provided that they were intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment.

As Mr Neal's duties were to perform his contractual obligations, the work which he carried out as overtime fell within this definition.

What do these decisions mean for employers?

These decisions confirm that where a worker’s pay consists of a basic salary and variable elements directly linked to their work, then holiday pay should be paid on the basis that the holiday pay received is comparable to normal pay as if the worker was still at work and not on leave.

The failure to pay the variable elements directly linked to the work could act as a deterrent from taking leave, which of course goes against the intention of the European Legislation.

The rules around holiday pay are already complex and not complying could leave a business open to a costly claim. Peter is a Partner and Head of Employment at Forbes Solicitors. He assists clients on the full range of employment issues and has dealt extensively with Transfer of Undertaking Regulations and other employment legislation, drafting and advising on contracts of employment, policies and procedures and Settlement Agreements. He is often involved in schemes of redundancies and discrimination cases.