Understanding holiday pay, overtime, commission and bonus

holiday pay overtime and bonusesLast updated May 2024

Holiday calculations are awkward at the best of times, but they can become even more complicated when an employee’s rate of pay changes due to overtime, commission, or bonuses, so we’ve simplified it for you with some do’s and don’ts!

But first, we’re going to talk about the legislation and UK case law that has created these rules.

What’s the legislation?

In 2024, EU case law determined that the first 4 weeks of holiday pay should be based on ‘normal pay’ which means including the average of any additional payments from overtime, bonus, commission, or call outs etc.

The guiding principle behind these decisions is related to health and safety. This is on the basis that if an employee does not receive their normal remuneration while they are on holiday then they are dis-incentivised to take the holiday, which is not conducive to their Health and Safety.

The UK has now reinforced this decision and from April 2024 has implemented supporting legislation to require holiday pay to be calculated over a 52-week average, including any ‘regular’ additional payments.

What counts as ‘regular’ additional payments?

The phrase ‘regular’ is frustratingly vague and relies heavily on context and interpretation, but an Employment Tribunal in 2019 defined regular as:

“There is a pattern of work which extends for a sufficient period of time on a regular and/or recurring basis to justify the description ‘normal’ then it should be taken into account when calculating holiday pay”

Based on various advisory bodies and tribunal outcomes, we suggest you look at the 12-week period before an employee goes on holiday. If the employee has received multiple additional payments, such as receiving 3 hours overtime pay in 6 out of 12 weeks, this is likely to be considered part of their ‘normal’ pay. If there has been no overtime or additional payments in that period, payments are unlikely to be considered regular.

If you decide that the employee has received regular payments, you now must look back at what they have earned over the last 52 weeks. This sum will be used for the first 4 weeks of their holiday pay.

The same applies for bonus, commission payments and any other enhancements such as regular uplifts for call outs. If your team members each participate in an ‘on call’ rota and receive an uplift for this duty, you will need to include this in the calculation of their holiday pay.

Remember, payments need to be ‘regular’ so an annual performance bonus is unlikely to meet these criteria, but a monthly commission scheme probably will.

Holiday pay do’s

  1. Communicate with your employees and let them know how you are calculating holiday, and what will or won’t be included. Setting the parameters up at the beginning will reduce the chance of a grievance.
  2. Decide whether you are going to apply an uplift to the first 4 weeks of holiday only, OR, if you are going to apply the uplift to the full 5.6 weeks.
  3. Whatever you decide, remember that custom and practice can create contractual terms, so if you enhance your policy beyond the legislation, you may be obligated to maintain this practice in the future.
  4. Calculate ‘normal’ pay by looking at a 52-week period, or if the employee has worked for less than this, the length of their service with the organisation.
  5. If the employee is not happy with the calculation, they can ask you to calculate the holiday pay over 104 weeks instead and you must agree.
  6. Remember to recalculate before each period of annual leave. If the employee’s normal earnings have increased since they last took a holiday, this needs to be updated.

Holiday pay don’ts

  1. While it’s helpful to communicate your policies and working practices, be mindful not to set a hard ‘rule’ that cannot be broken. Rules that apply to everyone, without exception, could invite an indirect discrimination claim.
  2. If someone raises a concern about their pay, particularly if it related to a protected characteristic or a statutory entitlement, respond to them in writing putting forward the business rationale and confirm that you have considered their individual circumstances.
  3. When calculating holiday pay over 52 weeks, you could see the average decrease if the employee has received a pay increase or changed role. Even if their ‘normal’ pay is lower, don’t lower the employees’ weekly rate below their current salary level or you could be in breach of contract.
  4. Legislation on holiday pay has changed significantly in the last 10 years, so, it’s possible that at some point your policies may not have been compliant. If you’ve made a mistake in the past and this is raised by an employee, don’t avoid it. Employees can submit a claim for unlawful deduction of wages for up to 2 years of back dated holiday pay, and you would also have to manage any tribunal costs. Speak to your employees about the changes and maintain an internal dialogue.

This is a complex subject and we recommend that if this ruling appears to affect you, that you take the time to get some sound legal advice and take a fresh look at the wording in your employment contracts around holiday pay and how that is calculated. You will probably need to review the wording and formally re-issue it to staff as you would any other contractual change.

How Jaluch can help

If you’d like to talk to one the Jaluch team about how to calculate holiday pay in your business, we’d love to hear from you. Please do get in touch if you’d like some support, or give us a call on: 01425 479888

Are your managers feeling that all this legislation is becoming a little overwhelming? We can either deliver training on these topics for you or, if you want a more cost effective solution, take a look at our training kits.

The information contained within this article is for general guidance only and represents our understanding of employment and associated law and employee relations issues as at the date of publication. Jaluch Limited, or any of its directors or employees, cannot be held responsible for any action or inaction taken in reliance upon the contents. Specific advice should be sought on all individual matters.

Further reading

🔎 Holiday headaches for HR

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