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Holiday pay rulings on overtime and commission

From July 2015 employers will need to take into account overtime when calculating holiday pay, so that it is calculated on their actual earnings, not basic pay – and a similar change taking into account commission may be on its way. We explain what this means in practice for small businesses.

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Following a number of cases that came before the Employment Appeal Tribunal (EAT) it was ruled that it is wrong for employers to only take into account basic pay when calculating how much an employee should be paid while they are on holiday.

This means that from 1st July 2015, employers will also have to take into account any commission or overtime that an employee has earned or worked when working out how much holiday to pay.

A similar ruling also took place on commission meaning this would also need to be taken into account when calculating holiday pay. This is currently being reviewed and we are awaiting a decision on this. We will update this guidance when it becomes available.

In addition to this, employees will also be able to back-date claims for up to two years. Though going forward, anybody making a claim must have had an underpayment for holiday pay that has taken place within three months of lodging an employment tribunal claim.

One piece of good news for employers is that this method of calculation is restricted to the 20 days’ statutory holiday required by the Working Time Directive, rather than the 28 days in UK law. This means you only have to make holiday up to 20 days, though this could create obvious administrative issues.

How to calculate holiday pay with overtime

From 1st July 2015, where hours and earnings vary, holiday pay should be based on an average of their actual earnings calculated over a 12-week reference period.

Members of the Forum can call our helpline on 0845 130 1722 for help with working out pay.

What should employers do now?

Employers should be prepared to review their annual leave arrangements to ensure that overtime (and potentially commission) or other relevant variable payments are factored into holiday pay calculations.

You may also want to look at existing pay structures, contracts and commission policies to consider if these need reviewing in light of recent developments. However considerable care needs to be taken if you intend to adjust any staff payment structure.

As you can see, this issue is potentially very complex, especially for those small businesses that rely heavily on overtime to cover busy periods or commission to drive performance. It could be costly, not only in terms of backdated payments but also in the time needed to make any necessary changes to procedures.

As with all areas of employment law, it’s best to get expert advice before you act to make sure you’re on the right track. Forum members can call our helpline on 0845 130 1722 for help with holiday entitlement and varying contracts of employment. All advice is backed up by comprehensive legal protection insurance.

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