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?

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.

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.

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.

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

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 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.