What Constitutes Holiday Pay?

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woman relaxing in chair with cocktail at a Caribbean beachNew controversial ECJ ruling with major ramifications

You may have heard about the recent European Court of Justice (ECJ) ruling regarding commission payments.  The Advocate General of the ECJ declared that holiday pay should include an element to compensate for the amount of commission that the person would normally earn whilst at work. So now, what constitutes holiday pay?

In essence he believed that if a person would be ‘financially disadvantaged’ when on holiday, they would be unlikely to take their holiday entitlement.  Since holiday is designed to allow a period of rest and leisure time, the Advocate General said a person should have enough pay to enable them to feel comfortable taking holiday.

In October 1998 the Working Time Regulations (WTR) came into force entitling all UK workers to 5.6 weeks paid holiday each year.  However the regulations don’t state how the holiday pay calculation should be made.

The European Court of Justice has now adopted the ruling given by the Advocate General, pushing the UK decision on pay calculations back to the tribunal court.  It seems likely that UK legislation will now be amended to take account of the ECJ ruling.

How to make future calculations

Where a worker has normal working hours but their pay varies, they are entitled to holiday pay based on their average pay over the preceding 12 weeks.  There is no change here.

Where someone is paid based on commission, the average amount of commission over a previous, as yet undefined, period should now be used in the holiday pay calculation.

As with all case law, the ECJ decision now applies. But is unclear what this really means to managers. We urge a precautionary approach, implementing reasonable practice now rather than living in hope that legislation will not backdate the requirement to include commission in the pay calculation.

It has to be said that within TimelessTime we openly challenge whether or not commission is actually the best way of getting high performance from staff. There is much discussion about whether money is a motivator and readers should consider in any case if they have the correct pay structure if heavily reliant on variable elements of pay to motivate and incentivise. This is a different topic and references to other blogs and articles related to this can be found at the end of this article.

Forward planning

Commission payments should be included in the holiday pay calculation going forward.  At the moment the calculation should perhaps be treated in the same way as for other workers with variable pay; an average of the previous 12 weeks.  We will have to wait to see what legislation is introduced before giving clear guidelines on time periods over which calculations should be made.

Financial planning must be undertaken by managers now to recalibrate their firm’s salary bill projections to include both commission and overtime when making allowance for holiday pay.

It is also important to understand the financial implications of this ruling for the firm if a decision is made to backdate the liability for commission and/or overtime holiday payments.   An audit of the potential liability should be undertaken now.  Dependent upon the interpretation of the ruling that will be implemented in UK legislation, the liability could go back to the WTR adoption date, or the date the person joined if this is later.  There could also be a liability to employees who have left the firm.  This is all to be confirmed.

Just to add to the complication, the European Working Time Directive gives the right to 4 weeks paid annual leave and it is only to this element of holiday pay to which the ruling applies.  The additional 8 days under UK WTR and any further days awarded by a firm could be excluded in the calculations. When the legislation does come, it is likely to contain complex calculations made all the more so if the firm has a complex holiday, commission and overtime structure.

What constitutes holiday pay?

Documentation should be reviewed within firms now to ensure that Ts and Cs and other employment contract documents accurately reflect what is and what is not part of the normal pay.

Indeed there is an opportunity to review whether commission payments are the most effective means of achieving the required for your business.  You can read further articles about this subject by following these links:

If you would like to discuss holiday pay, how to incentivise staff effectively or the whole business of pay, please contact us.

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