Holiday pay – the story so far

Since 2003 there have been significant changes in holiday pay. We look at those and the potential future changes and discuss how businesses can prepare for them.

Case law timeline

Where do these changes leave employers as we move into a new calendar year? (view timeline)

Making decisions about your employees holiday pay

Q Should employers now include all commission scheme payments into holiday pay automatically?

No the 2016 employment law case of British Gas v Lock was very specific. The judgement should not be used as a green light for all commission schemes needing now to be included in holiday pay. This particular employee, Mr Lock, was found to be at a disadvantage when he was on holiday because the scheme was results based and it was something he regularly received when he was working. The judgement found that there was in his case a very real possibility that he could be deterred from taking annual leave because of the financial impact not receiving the commission could cause him. In his case the commission was 60 per cent of his wages and ordinarily he received this each month as part of his remuneration so it was thought to constitute normal pay.

Q Should employers now start to include annual bonuses into holiday pay because of this judgement?

No, not at this point and indeed within this case we are pointed to steer away from thinking the next logical step might be to include annual bonuses. This is not the case.

Q What reference period should an employer now be using, if it needs to use a reference period?

In the absence of any clear guidelines, a 12 week reference period is sensible, for calculating what average or normal pay should be for an employee, unless there are some larger payments in that period that would make a longer timeframe more sensible.

Q What options does an employer have now and what should employers do following this judgement?

The employer has the option to review their remuneration approaches remembering some will either be contractual or may have become contractual through time. This may be a good time to review schemes and make an assessment of elements within your pay bill. Consider if the worker suffers a financial detriment as a result of taking holiday if holiday pay is based on basic pay only. It is important to understand the implications for your organisation now, even if you don’t take immediate action. 

What else do employers need to know on this subject?

All of the above only applies to four of the 5.6 weeks statutory holiday entitlement a worker is entitled to. 

The next concern for employers is when or if regular voluntary overtime being included in holiday pay is tested in an employment tribunal in England and Wales (already tested in Northern Ireland). Logic suggests that there is a good chance this is the next area we will need to consider.

See below a summary of what’s in and what’s out currently (accurate as at January 2017).

In     

  • basic pay;
  • guaranteed overtime; 
  • non-guaranteed overtime;  
  • some shift / travel allowances; and
  • results based commission which are ordinarily paid.

Out for now:

  • voluntary overtime (where it is regular).

Unlikely to be included:

  • some commission plans; and
  • annual bonuses.

Please contact Nicki Barnes for further support, advice or information.