Holiday pay – awaken from the nightmare?

The five-year saga on determining holiday pay for those on commission, and other variable earnings, continues with the latest ruling from the Court of Appeal that results based commission must be included when calculating holiday pay. This includes overtime and standby payments.

Salaried staff are included.

There are still uncertainties, such as how far back-pay should be calculated and what to include in pay. Some aspects of variable pay are uncertain, should year-end bonuses be included, for example?

Despite uncertainty we suggest that it is time to look forward and future proof the business against any further rulings.

Aye Limbin Glassey, employment law partner at Shakespeare Martineau confirms: “Now is the opportune time for employers to put the necessary measures in place.”

Possible solutions

1. Commission earners

One solution we suggest is to create a “holiday pot” into which 12.07% of the employee’s earnings are put. This pot is then paid back to them when they take their holiday, at a rate that ensures it is all used up by the time they have taken all their 5.6 weeks statutory holiday. So long as commission is spread relatively evenly throughout the year, earnings will not be adversely affected by taking holiday. Difficulties may still arise though where there is seasonal variation. There is currently no guidance on reference periods.

2. Variable hour earners

A variation of this solution for employees on a fixed hourly rate, but variable hours, is to put the 12.07% into the “pot” as hours rather than as pay. These hours then become available for payment at the fixed hourly rate when holiday is taken.

3. Variable hours and rates

Hours can still be accumulated in the “pot” as in 2. above but then the hourly rate paid to the employee when taking holiday is the average rate over the previous twelve weeks. Where there is seasonal variation, in overtime for example, it may be better to take twelve months rather than 12 weeks. However, as noted above, there is currently no guidance on reference periods.

4. Bonus earners

The significant lack of clarity on this issue must leave employers needing to be cautious. If it is not to be included in the 12.07% holiday pot then some provision should be made lest future rulings require them to be included.

5. Unionised employers

These blogs focus on small and medium sized employers, mostly non-unionised. But changes to the calculation of holiday pay need to be discussed or negotiated with any recognised Trade Union.

The technical logic

12.07% represents the additional earnings (beyond the work for which they are paid) that a salaried employee receives as holiday pay. That is 52 weeks in a year divided by 48.4 working weeks gives 1.1207 – the .1207 is the holiday pay element, which equates to 12.07%.

Note should be taken of ACAS guidance: “Employers should pay their employees at the time they take their leave. They should not use any form of ‘rolled-up pay’, where holiday pay is staggered over the rest of the year. “ (Our italics).

Will these solutions meet legal requirements?

In a world where contractual arrangements between employees can be, in effect, torn up by legal rulings, nothing is certain. It is the outlawing of an otherwise legal contract (Lock v British Gas) that unleashed this nightmare in the first place. However, we would expect our suggestions to meet legal requirements for the reasons we explain below.

The European judges were concerned that employees should not be discouraged from taking holiday, as would happen if their earnings were adversely affected by doing so. If an employee’s earnings were dependent on commission then his or her earnings would be likely to be affected since they would not be earning commission while on holiday.

In most cases, these solutions will ensure that, during holidays, employees receive pay that reflects the pay received during their normal working weeks.

What about the cost of these solutions?

There will be administrative costs to all these solutions but, once set up with appropriate software, the ongoing costs should be minor.

Compared to those past situations, where employees received less pay while on holiday, there will be a small financial cost to the payroll, at least in the short term. We would argue that this is outweighed by the value of certainty and an improved employee perception of you as an employer.

Furthermore, in the medium term we would claim that there will be no cost. Labour market rates will adjust so that the total real cost of an employee becomes no greater than it would have been prior to such changes.

Our blogs are not a substitute for legal advice.

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